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Daily Newsletter, Sunday, 01/28/2001

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The Option Investor Newsletter Sunday 01-28-2001
Copyright 2001, All rights reserved. 1 of 5
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MARKET STATS FOR LAST WEEK AND PRIOR WEEKS
******************************************************************
WE 1-26 WE 1-19 WE 1-13 WE 1-5
DOW 10659.98 + 72.39 10587.59 + 62.21 10525.38 -136.63 -124.84
Nasdaq 2781.30 + 10.92 2770.38 +143.88 2626.50 +218.85 - 62.87
S&P-100 709.06 + 3.83 705.23 + 17.35 687.88 + 6.17 - 4.74
S&P-500 1354.95 + 12.40 1342.55 + 24.00 1318.55 + 20.20 - 21.93
W5000 12527.30 +143.40 12383.90 +202.60 12181.30 +308.80 -294.50
RUT 498.68 + 10.59 488.09 + 2.34 485.75 + 22.61 - 20.39
TRAN 2956.19 + 2.90 2953.29 - 48.69 3001.98 -112.01 +167.39
VIX 25.14 - 1.15 26.29 - 1.33 27.62 - 4.41 + 1.80
Put/Call .59 .48 .60 .63
******************************************************************
Kiss those fractions goodbye!
By Jim Brown
A new era in trading is about to begin and an old era comes to
a close. After 208 years of trading in fractions, stocks will
switch to decimals on Monday morning. Lets hope we can mark that
day in the win column and not as a loss. After a morning opening
drop of -68 points as a result of an absolutely horrible PMCS
earnings announcement, the Nasdaq rebounded yet again. After
the initial dip to 2686 the index bounced back over and then
skidded to a stop at 2700 and then rallied to close positive.
The sentiment was clear. The market shrugged off bad news and
rallied higher even after a +500 point gain over the last three
weeks. Bullish anyone?
Nasdaq:PMCS was the story stock of the day. After a horrible
conference call, where the company said they had not received a
new order in eight weeks, the stock traded as low as $62 or -$32.
After the initial drop the stock rallied back to close at $73.75
regaining one third of the loss. Other companies in the sector
suffered as well but NASDAQ:BRCM closed up almost +$6 even after
being downgraded by Robertson Stevens. It appears investors were
looking behind the news and shifting into the stocks that had
good individual earnings while avoiding the weaker issues. PMCS
was hit by multiple downgrades and several were serious. CSFB cut
estimates from $1.70 to $.88, JPM from $1.67 to $.92 and GS from
$1.66 to $1.01. Obviously room for an upside surprise now!
Nasdaq:JDSU rebounded after the initial drop after reporting
earnings on Thursday that beat the street but then lowering
expectations going forward. Investors decided the warning was
not material and jumped on the stock as a lifeboat in a sea of
more serious earnings disasters.
Nasdaq:ERICY was the ugliest story of the day after announcing
that they lost over $1 billion in their cell phone business last
year. They said that 2001 would be even weaker. They are making
changes to reduce the losses and those changes include turning
over the manufacturing of cell phones to Nasdaq:FLEX. The move
will save $1.6 billion next year. ERICY lost -13% today.
Nasdaq:CSCO fell after the PMCS warning when they said sales to
CSCO, their biggest customer, were slowing. Several analysts came
out and cautioned about CSCO earnings which are due out on Feb-6th.
They are not worried about them missing the numbers but warning
about growth going forward. As the largest supplier of routing
equipment CSCO is seen as a barometer of the tech sectors health.
CSCO recovered about $2 of the initial drop and closed down only
-.94 cents.
NYSE:DY, Dycom Industries fell Friday after the telecommunication
provider said sales from major customers were slowing drastically.
They said major customers were postponing or even canceling some
projects. They said earnings could drop as much as -25%. The
stock dropped from $31 to $20 at the open but regained some by
the close.
The economy is losing the financial Superbowl. This week alone
job cuts for big name companies were over 40,000 jobs. The leaders
in the layoff bowl included Nasdaq:WCOM -7000, NYSE:LU -16,000,
NYSE:JCP -5,000, NYSE:AOL -2,000, NYSE:SLE -7,000. If the Fed
needs any more indication of weakness they only need to look here.
It is not a question of "if" the Fed will cut rates next week
but by how much. Alice Rivlin said today that the Fed would go
all the way and cut 50 points. That would be great if she was
still a voting member but she isn't. Others say the Fed will hold
to a gradualist policy and only drop 25 points. This would be the
equivalent of Greenspan standing on the edge of the cliff and
yelling down at the falling economy and saying "I cut rates, I
cut rates!" That is nice but it would not be enough to cushion
the sudden stop at the bottom.
Things are grim by Greenspan's own admission. Saying the economy is
currently at zero and falling, implies that a recession is imminent.
This has traders worried. With earnings dropping through the floor
the Fed must take decisive action. First Call said earnings estimates
for tech companies in the S&P for next quarter have fallen from +11%
as of Jan-1st to only +2% today. Greenspan said he was now in favor
of a tax cut but that a cut would not jump start the economy fast
enough to avoid a crash landing. This has stimulated the analysts
to speculate that Greenspan thinks things are bad enough to cut by
a full 50 points. This and Rivlin's comments today are what pulled
the techs off the bottom and revived the market. If you look at many
charts and CSCO is a prime example, you will see a spike at 1:30
which is when the Rivlin statement appeared in the press. Another
spike intraday was credited to Abbey Joseph Cohen who said on CNBC
that the leading companies in the "data storage sector" and the
"Internet infrastructure sector" were significantly undervalued.
She would not identify them by name but traders read between the
lines and bought CSCO, JNPR, NTAP and EMC shortly after 1:PM.
The Fed will have a strong economic calendar to deal with next week.
The surprisingly strong Durable Goods Report on Friday is not likely
to continue with next weeks reports. Durable Goods rose +2.2% when
they were expected to fall by -2.0%. The difference was a strong
jump in aircraft and electronic components. If you took out
transportation orders the index would have dropped -1.4%. Next week
we have Consumer Confidence on Tuesday, GDP, Chicago PMI, New Home
Sales on Wednesday. Thursday has Personal Income/Spending, Construction
Spending, NAPM Index and Friday the big Non-Farm Payrolls, Factory
Orders and Michigan Sentiment. You can bet the Fed will have advance
notice of the Payroll numbers to help them with their decision.
The top 24 bond dealers were surveyed and they were unanimous in
expecting a -50 point cut. This is setting us up for a dangerous
situation. If the Fed cuts by 50 points, the market has already
priced it in and we could actually have a sell on the news event.
Also if the Fed does cut 50 points there may be a sell off due to
worry about the economy being worse off then we know. What do they
know that we don't know? If the Fed only cuts 25 points there will
definitely be a sell off on the fear that the economy will not
recover quick enough. Initially it looks like a lose/lose situation.
However, with either cut the long term market direction will be up.
The markets always follow the Fed and while there may be a day or
two of market instability the eventual direction should be up.
TrimTabs said $10 billion of new cash came into stock funds last week
but that is only a drop compared to the $600+ billion already on the
sidelines. With earnings almost over, more than half of the S&P has
announced and 20 of the 30 Dow stocks, they are only waiting for the
Fed before they move. The fact that the market is shrugging off bad
news left and right is evidence of money coming back into the market.
With no dip events in sight, other than the FOMC meeting, buying
opportunities are dwindling. You have heard us say several times
that some situation had brought the market to a pivotal point. Well
this is the REAL PIVOT point. This is the defining moment for the
market in 2001. The normal post earnings depression meets a possibly
aggressive Fed. The shootout at the O.K. Corral. There are analysts
screaming that the market is overbought and ready to crash back to
2200. I really hope they are wrong but we have to be ready for that
possibility as well. Monday is likely to be up but after that all
bets are off. The fear of the unknown could increase volatility
substantially and even though everyone expects a rate cut, no one
knows what to expect after that. Will traders sell into the rally
or will they start throwing money at the market? Did you know that
historically the day after a rate cut is normally down? Just another
piece of market trivia that can cost traders money. No guarantees but
plan accordingly!
The Superbowl hype is on with 120 million expected viewers.
With ads running $2 million dollars the field of advertisers has
narrowed considerably. Only three of the seventeen dot coms that
advertised last year are returning. Etrade, Hotjobs.com and
Monster.com are the only repeat Internet companies willing to
cough up the money for a 30 sec advertisement. Hotjobs.com who
will be advertising for their third Superbowl in a row said they
spent their entire annual advertising budget on the Superbowl two
years ago. This year the same ad time only amounted to 5% of their
annual budget! Is Etrade so flush with cash that they can pay two
guys in plaid and a chimp to do nothing for 30 seconds and laugh
about it? Their total profit last quarter was $1.4 million and
they are spending $2 million on a horrible ad. Go figure!
Trade smart, enter passively, exit aggressively!
Jim Brown
Editor
************************************
Spring Options Workshop and Bootcamp
April 5th-9th, Denver Colorado
************************************
OptionInvestor is proud to announce our third annual Spring
option workshop in Denver Colorado. This power packed five-day
event is structured to fully educate you on advanced option
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If you attended the March Denver Expo last year and thought it
was the best function you had ever attended... You haven't seen
anything yet! Great food, entertainment, education and just
plain fun in sunny Denver. The biggest complaint in March was
the massive weight gain experienced by the attendees from the
gourmet menu. We know how to put on a function. Ask anyone who
came last March!
We guarantee the speaker lineup to be second to none. In the
October seminar not only did we have Jim Brown and over 15 of
the OIN staff but Steve Nison, the father of modern candlestick
charting. Also, Dick Arms, creator of the Arms Index or the Trin
Indicator, Gregory Spear, author of the Spear Report, Stan Kim,
founder of the Snail Trader System and Jim Crimmins, president
of TradersAccounting.com. We promise the lineup this April will
exceed your expectations again!
This is not a beginner seminar but if you feel the need to brush
up on the basic trading strategies then we have an optional boot
camp the day before the four day seminar begins. If you have
traded options before and you are comfortable with the basic
strategies then this seminar will take you to a new trading
level. If you have been trading options for sometime and are
ready to broaden your knowledge and improve your trading results
in all kinds of markets then this is for you. Meet and interact
in a small group setting with the writers you have seen in
OptionInvestor for the last four years.
We are starting the seminar with an optional one day boot camp
which will cover all the basic strategies, calls, puts, leaps,
covered calls, naked puts, spreads, straddles, etc. This will
help investors not familiar with all the basic strategies get
up to speed before the intensive education and the advanced
material in the main seminar. The boot camp will be 8 hrs of
personal instruction by the OIN staff.
The main seminar will begin with a reception, dinner and
entertainment on Thursday night and continue non-stop until
noon on Monday. We mean non-stop. We don't quit until you do
and many optional sessions last until 10:PM or later.
The detailed schedule will be posted in about two weeks. There
will not be individual breakout sessions during the day. Each
topic will be covered in 1-2 hr general sessions taught by one
or more OptionInvestor staff and presented on three giant screens.
In the evening we will offer five of our popular chalk talk
sessions for that personal question and answer interaction.
The list of instructors is led by Jim Brown and will include
many OIN staff with outstanding guest speakers during lunch
and dinner each day. The Spring Denver Expo seminars fill up
fast and seating is limited! SIGN UP NOW or risk missing out
on this opportunity.
Unlike other seminars with only two or three instructors, you
will get in-depth knowledge from many different instructors
who are experts in their field.
The cost for the four-day workshop, April 6th to 9th is only
$2995 (spouse only $1495). This includes breakfast, lunch and
supper each day. All course materials, a CD of all the
presentations and a professional video package of the entire
seminar so you can review the material at home in the comfort
of your living room. There is also a $500 discount if you
have attended a prior OIN seminar.
This is not a prepackaged presentation that gets repeated over
and over with stale information. This is a one-time production
and everything is fresh, live and as current as we can make it.
The videos will have your real time questions and answers and
not some from a prior class. Where else can you get intensive
yet personalized options education like this?
Do not delay as seating is very limited.
We guarantee you will not be disappointed!
You can pay for your education one bad trade at a time or you
can invest less money one time to learn how to do it right.
Click here for more info:
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If you have not been to one of our Denver Expo seminars before
here are some comments from previous attendees:
The words herein are totally inadequate to express what I am
feeling about you and all the OptionInvestor organization. But
this medium is all I have. Thank you more than these few simple
words can say.
Wow, what a seminar! In my 25 years of investing I have attended
many instructional conferences, but I have never, never experienced
one like your Options Expo. The instructors were absolutely tops.
Subjects, generally were on target. Especially for me, the Skybox,
index funds/options and the early morning strategies and trading
were particularly great. The attention to the many details and
nuances were especially evident, and I guess most of the credit
that area goes to your great support team.
Now, the real challenge is to apply and implement the powerful
knowledge I was exposed to.
Sincerely and warmly,
Kevin Hughes, Denver
************
Jim & Staff,
I am sitting in the hotel room after a great 3 days in your
seminar. I can't tell you how pleased I am and want to thank
each of you for a job well done. Having been responsible for
events like this, albeit on a much smaller scale, I can recognize
all the hard work that went into the seminar. Each member of the
staff is to be congratulated!! The seminar confirmed my belief
that the OIN staff really cares about the success of their
subscribers. Jim, you all should be proud of the work you do to
enrich the lives of so many people. It is one thing to amass a
personal wealth. It is a much higher calling to help others meet
their goals in life. I was very impressed that you were emotional
in your closing remarks. You have so much to be proud of -- helping
people fish all over the world! Thanks again and I look forward
to attending another seminar in the future.
My best regards,
Jim Boettcher
Austin, Texas
**************
I must say, that your seminar was outstanding!!! Sign me up for
next year. It is rare that a person of your position would share
so generously your knowledge of his trade. I hope that I will be
able to put into place much of what you taught. Every aspect of
the seminar was first class, from the hotel, to the food, the
instructors and the luncheon speakers. One of the biggest
surprises was your generosity in handing out material, and gifts.
Two weeks ago I attended a competing option seminar in Chicago
and all I got from the was coffee at the morning break, No
handouts, no food and half of the final day was promoting their
web site and additional classes. I must say your seminar far
exceeds what I got from them.
Sincerely yours,
Mike Lillis
***************
Please pass on my thanks to the entire OIN group for a fabulous
EXPO. The seminar far surpassed any expectation that I would have
fathomed, had I attempted to! OIN has the right attitude and the
obvious ability to be a leader and I look forward to many years
of positive experiences with you folks.
Kind regards,
Gwen Richardson
****************
GREAT JOB TO EVERYONE!
I described this event to my friends as a life changing event!
(options aside) ,the quality of people, dedication, sacrifice
of their time (the second 40+ hours a week they don't have to
work but do) they do this because they care, wanting to help
others change their life dramatically (My wife thinks I was
oxygen deprived up there !) I came back a different person for
those who know me that says a lot. Now for the options side
I have to admit there was so much info to absorb, most of it
came to me on the 2000+- mile ride home it all started to fall
into place I feel Very confident (yes Jim this can be bad but
I know this now!) Notice the patience here guys! that's one
change I have a plan to stick to !
THANK YOU !!!
Allan O'Neill
**************
Need we say more? If you want to learn how to be a better trader,
making more and losing less then you should come to this seminar.
We guarantee you will not be disappointed!
For more info:
https://secure.sungrp.com/workshop/april01/index.asp
*********************
EARNINGS SCHEDULE
Jan-29th to Feb-2nd
*********************
The earnings calendar is too large to email.
Please visit the website for the complete list.
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**************
EDITOR'S PLAYS
**************
I was tempted but I resisted!
The -$32 drop in PMCS was a strong temptation. I had several
readers email me saying they were going to write naked puts
on it at the open. If they did then they are probably up
over $10 today. The drop to $62 from $95 was a classic entry
point for a naked put or even deep in the money calls. There is
a strong possibility for a dead cat bounce on a market favorite
that gets killed by some significant event. If you bought calls
or sold puts then congratulations. I chickened out. At the
office we listened to the conference call and it was less than
awe inspiring. It was very depressing. No new orders in eight
weeks? That is scary! If you are playing this stock I urge you
to keep your stops tight. The dead stop at $75 in the afternoon
is a dead giveaway that there is still some selling pressure.
I got quite a few emails from readers on the high profit
covered call strategy from last Sunday. This is good! It shows
that some of you are looking for returns not just the excitement
from trading. Here are a couple of other candidates for the same
type of strategy. The returns are assuming you are called out
and are on margin.
COHR $ 52.31 MAR-$ 50 Call $6.88 = 17% return
EMLX $106.75 FEB-$110 Call $7.38 = 20% return
CHKP $155.00 FEB-$160 Call $10.25= 20% return
NUFO $ 48.50 FEB-$ 50 Call $5.38 = 28% return
RIMM $ 71.56 FEB-$ 75 Call $5.63 = 25% return
GSPN $ 40.69 FEB-$ 40 Call $4.75 = 20% return
GSPN $ 40.69 FEB-$ 45 Call $2.63 = 36% return
For those of you who are afraid of covered calls because the
stock might drop there are ways to avoid all but the most
serious disasters. I am not talking about stop losses. The
best way to prevent a serious problem is to sell deep in the
money calls. This lowers the risk considerably but also lowers
the return. Ray practices this in the Covered Call section of
the newsletter. Many times he will suggest a call that is 25%
in the money or more. The return is normally around 7-11% per
month but the stock has to drop 25% or more to lose money.
For instance in the list above NUFO is $48.50. You could
buy NUFO on margin and sell the FEB-$40 Call for $10.75.
Your return called out would be 9% (10.75-8.50/24.25=9%)
NUFO would have to drop below $40 for you to lose money.
That would be a -17% drop which of course is possible but
not likely without a market event to drag the stock down.
For traders the possibilities next week are endless. With
the market likely to be up on Monday/Tuesday and then wild
and crazy on Wednesday the best course of action would be
something that takes advantage of the market moves without
having to pick stocks.
The obvious choice is the QQQs. They closed at 65.50 and the
high on Wednesday was $69.13. Currently the bid on the Feb-69
call is $2.00. If the QQQ rallies back to Wednesday's high of
$69 before the Fed meeting then the bid would be over $3.50
for a return of +75% for a two day play. Simple and profitable.
Even cheaper but less exciting would be the DJX-108 calls at
$1.40. A +200 point jump in the Dow (10864) would result in a
$1 gain or a 71% profit.
Considering that next week may be volatile you could also pick
a stock that is not expected to jump around with the markets.
CPN at $42 is an energy stock that stands to benefit from the
resolution of the energy crisis in California. The $40 call
is only $3.88 and it is $2 ITM already. Any gain by CPN of
more than $1.88 puts you into a 100% Delta situation. A move
back to last months high of $47 gives you almost a 100% gain.
The comment by Abbey Joseph Cohen on Friday that leading
"data storage" companies were under valued brought a flood
of interest into EMC. The $70 Jan call option had a volume
of over 10,000 contracts. This option is $9.06 ITM and the
price is $11.13. That makes the real cost only $2.07 for a
fast moving stock that is likely to gain over $10 in the next
three weeks. I like DITM options with 100% Delta and this
would be my choice for EMC.
Lottery play: Here is a sleeper for you. NOVL is currently
$8.41. The Feb-$10 Call is only a quarter ($.25). Earnings
are not until late February and a Nasdaq rally could easily
add a couple dollars to NOVL's price. This is strictly a
lottery play but it would not take much of a bounce to get
a double or better here.
Other than the normal aggressive calls/puts that can be found
in the regular newsletter, I would consider the plays listed
above to be low risk. With the entire fate of the market
resting on the FOMC meeting on Wednesday it is difficult to
predict market direction. The closer we get to 2:15PM on
Wednesday the more fragile the market will become. I am a
gambler but I only like to play when I can get the odds more
or less in my favor.
Good Luck
Jim Brown
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****************
MARKET SENTIMENT
****************
Rumor Becomes News, Snakes In The Grass
By Austin Passamonte
All things are new under the sun. Greenspan's a proponent of tax
cuts, rate cuts, haircuts... you name it. We wonder how long &
hard he might have hammered on President Gore for that tax cut
had a few hundred pregnant chads given birth on those Florida
ballots?
Bullish fundamental divergence: Investors shrug off bad news and
buy suffering stocks anyway. Earning warnings? Ah forget about
it. No worries. Interest rates are coming down and the bull-run
is ready to resume.
Sounds great to us; we'd love just one more shot at 1999 in our
lifetime. Wouldn't you? A nice rally to new highs and beyond
would be mighty fine indeed.
However, there may just be a snake or two slithering in those
pastures bulls are ready to run rampant in.
The VIX and VIXN being two little garter snakes. VIXN? Yes, it is
CBOE's newest sentiment product that tracks the Nasdaq 100.
Where'd they hide this one for so long? Anyways, it seems to
trade in a recent range from 60 to 90 with 60 being a bearish
signal near tops and 90 a bullish value near bottoms. Take a wild
guess where we are tonight?
Yes, both VIX and VIXN (male & female? Will they offspring VIXS
for the SPX? We digress) are near bearish reversal readings and
need monitoring from here.
Moving the herd over to balmy palmetto pastures where eastern
diamondback rattlers lurk, we have the reality of earnings season
drawing towards a close. That and the FOMC rumor of how many
basis points will soon become news, and we know the old saw about
that one. It's our opinion that a 50-basis point cut is already
priced in and nothing short of 75-bp cut will push markets higher
on its own.
That leads us to cattle grazing on the African plains with lush
grasslands head-high and full of nourishment, but watch out for
those black mambas moving about. This long, thick and fearless
viper may also be found at the top of our daily index chart
stochastic signals where fast bars are currently crossing down
through slow bars, threatening to poison the current rally.
Don't look now but daily tech charts are showing stochastic
values at higher relative highs than respective price action
stalled at lower respective highs. Easy rule to remember;
divergence that occurs in overbought zones are bearish.
Divergence in oversold zones are bullish.
We are now deep in overbought range and divergence is waiting to
confirm. This suggests a return to recent lows or lower if the
patterns complete. That would happen in the next few sessions
without reaching new relative price highs first.
But the biggest constrictor on planet earth is the Anaconda.
Found in South American wetlands, this colossal behemoth makes an
entire meal out of cattle. One per year is all that's necessary
to sustain. This might be akin to S&P 500 commercial traders who
continue to build an all-time historic, net-short position.
Many South Americans never see a single Anaconda in their lives
and therefore dismiss the danger. Sure, it's been mentioned many
times before but none have been found in the backyard pool so
what of them? Well, we wouldn't suggest wading about in waist-
deep water through backcountry swamps nonetheless.
To put things in dollar perspective, S&P 500 commercial traders
currently hold about $100 Billion (with a "B") long futures
contracts and $135 Billion (another "B") short futures contracts.
Simple math tells us they hold a staggering $35 billion in net-
short risk. Let us put our shoes & socks back on, it's kind of
drafty in here tonight.
There. Comfy toes again. Now where were we? Oh yes, $35 billion
at risk. In the SP00S pit. Belly of the beast. Pulse of the
market. Can these people be that daft? Are they stone stupid?
Someone needs to tell them we've got rate cuts going on around
here and this market is headed UP! $35 billion is a nifty chunk
of change to get caught in the midst of a short-squeeze on. Hate
to have retail volume spook them out of there with such a loss.
There wives might get pretty upset. Ours would
$35 billion. How many of the top Nasdaq 100 giants would it
take to equal that sum in annual earnings? You know, real money,
bottom line earnings? IndexSkybox's Buzz Lynn (a.k.a.
"Fundamentals Guy") could tell us for sure but we're willing to
bet it takes a few.
Would you wager to guess that all those big-cap NDX companies
added together equaling this in annual earnings employ some
pretty sharp minds? Is it fair to assume the minds that control
this money in one of the world's most volatile markets (other
than Nordstrom's 50% off tables on December 26th) are brighter
than the average bulb? Market Sentiment would venture "yes."
So there you have it. Every market guru on CNBC says were a lead-
pipe lock to go higher. Techs are too cheap. Bargains abound. The
bottom lies safely behind us. Etc, etc.
Abbey-Cohen, Joe Battapaglia & friends; Please watch where you
step. And enjoy the summer sunshine but stay out of waist-deep
water. You might not want to see what lurks just beneath those
beautiful, blossoming lily pads.
Wednesday is right around the corner, and faint rattling in the
distance catches our ear.
*****
VIX
Friday 01/26 close: 25.14
VXN
Friday 01/26 close: 62.46
30-yr Bonds
Friday 01/26 close: 5.61%
Support/Resistance Indicator
The Index Support/Resistance(S/R)Ratio is a formula used to
gauge possible support or resistance based on open-interest
disparity. Ratio listed is percentage of calls to puts or
puts to calls respectively.
Support is factored from dividing puts by calls at strike
levels beneath index closing price. Resistance is factored
from dividing calls by puts at strike levels above current
closing price.
Saturday
(01/27/2001)
(Open Interest) Calls Puts Ratio
S&P 100 Index (OEX)
Resistance:
750 - 735 6,661 318 20.95
730 - 715 7,294 1,518 4.81
OEX close: 709.06
Support:
705 - 690 6,335 8,574 1.35
685 - 670 1,893 5,027 2.66
Maximum calls: 740/3,126
Maximum puts : 650/4,340
Moving Averages
10 DMA 703
20 DMA 694
50 DMA 702
200 DMA 759
NASDAQ 100 Index (NDX/QQQ)
Resistance:
75 - 73 19,885 3,181 6.25
72 - 70 74,846 4,964 15.08
69 - 67 21,364 7,020 3.04
QQQ(NDX)close: 65.54
Support:
64 - 62 26,891 19,390 .72
61 - 59 13,371 54,949 4.11
58 - 56 10,772 12,738 1.18
Maximum calls: 70/56,113
Maximum puts : 60/47,217
Moving Averages
10 DMA 65
20 DMA 62
50 DMA 64
200 DMA 83
S&P 500 (SPX)
Resistance:
1425 19,450 4,734 4.11
1400 15,643 1,854 8.44
1375 12,692 6,575 1.93
SPX close: 1354.95
Support:
1325 14,489 12,918 .89
1300 1,674 12,772 7.63
1275 414 8,325 20.11
Maximum calls: 1425/19,450
Maximum puts : 1325/12,918
Moving Averages
10 DMA 1344
20 DMA 1329
50 DMA 1335
200 DMA 1418
*****
CBOT Commitment Of Traders Report: Friday 01/26
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade.
Small specs are the general trading public with commercials
being financial institutions. Commercials are historically
on the correct side of future trend changes while small
specs are not.
Extreme divergence between each signals a possible market
turn in favor of the commercial trader's direction.
Small Specs Commercials
DJIA futures (Current) (Previous) (Current) (Previous)
Open Interest
Net Value +426 +1909 -7528 -8322
Total Open
interest % (+5.66%) (+20.07%) (-30.35%) (-34.26%)
net-long net-long net-short net-short
NASDAQ 100
Open Interest
Net Value +1262 +1131 -4061 -4045
Total Open
Interest % (+8.36%) (+6.51%) (-5.90%) (-6.39%)
net-long net-long net-short net-short
S&P 500
Open Interest
Net Value +69952 +69254 -91053 -89836
Total Open
Interest % (+37.54%) (+37.35%) (-12.11%) (-11.84%)
net-long net-long net-short net-short
What COT Data Tells Us
**********************
Indices: The disparity between Commercials and Small Specs
remains huge on the S&P 500. Small Specs have reduced their net-
long positions on the DJIA while Commercials are showing a modest
reduction in DJIA net-short positions
Interest Rates: Commercials are moderately short T-Bond and
T-Note futures. (mildly Bearish)
Currencies: Commercials continue to build five-year net-short
Euro futures while small specs build net long. (Bearish)
Energies: Commercials are net-long crude & oil. These
producers are hedgers and almost always take the opposite
side of expected market action to lock-in production
prices. They expect lower prices from here (Bearish)
Metals: Commercials are moving to yearly net-long in Gold.
They expect higher precious metals soon. (Bullish)
COT/CRB: This commodity index measures the entire spectrum of
commodities in overall bullish or bearish outlook. It is now
near a one-year high for commercial bullishness, meaning the
outlook for commodities is long-term positive while equities
as a mirror are considered long-term negative.
Data compiled as of Tuesday 01/23 3:00pm Central by the CFTC.
**************
MARKET POSTURE
**************
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http://www.OptionInvestor.com/marketposture/012801_1.asp
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Dynamic Rotations
By Eric Utley
They're big. They're fast. And they're very profitable.
What I'm referring to, of course, are the dynamic sector
rotations in the marketplace currently. I've heard the media
and several colleagues label the recent action as a "traders
market" or "range bound" trading. Neither labels, in my
opinion, do justice.
I like to visualize the markets as one giant pool of capital.
A portion of that capital is fixed, meaning it is committed
to longer term positions. Other portions of that pool are
more mobile and dynamic. And that mobile capital is in
constant search of the most efficient places to go to work
(read: profits). The ebbs and flows of the mobile pool of
capital are closely tied to cycles, both long- and
short-term. These cycles I refer to incorporate the business
cycle, industry developments, even analyst actions. In short,
the cycles are as varied as they are innumerable.
Nonetheless, these cycles are easy to detect and can be
incorporated into a traders top-down thesis, including near-,
intermediate- and long-term opinions. Dick Arms, the
proprietor of the Arms Index, presented at our Denver Options
Seminar last fall and made an interesting point. The
influential Mr. Arms noted that institutions have become far
more active in recent years with their operations in the
market. In essence, Mr. Arms opined that instituitions have
become active traders. That fact might stem from the
increased velocity of information flow, and the equally
increased accuracy of that flow.
For our purposes, though, never mind why these dynamic
rotations have come about. Simply know that they exist and
make sure your trades are on the correct side of the
rotations.
To bring my rambling full circle, let's illustrate an
example of a micro-cycle/short-term rotation that took place
last week. As of last Wednesday's close, the Nasdaq Composite
(COMPX) had risen roughly 16 percent year-to-date. An
amazing rebound if you ask me! And as hard as it is to
believe, the COMPX had risen to an overbought condition and
was due for a pullback. Refer to whichever indicator you'd
like, it was easy to tell during last Wednesday's action that
the leaders of the COMPX were tired and due for a pullback.
So if we knew the COMPX was ripe for consolidation, we could've
reasoned that the mobile capital in the market would search
out other short-term alternatives in an attempt to profit
while the techs rested. And if the techs were going to
pullback, it would make sense to search out the sectors which
have polar correlations, such as drug stocks.
Sure enough, after Wednesday's tired action in techs, the Nasdaq
Composite subsequently slid early Thursday morning and the
drug stocks began to perk up. And after the PMC Sierra (NASDAQ:
PMCS) blowup Thursday evening (we'll elaborate on that below),
the drugs were poised to gap higher Friday morning, giving
anticipatory traders easy profits. And what happened Friday
afternoon? Well, after the Nasdaq inspiringly digested the
badness from PMCS, it began to recoup its earlier losses as the
mobile capital flowed back into tech and out of the drugs. The
flow of capital is easily discerned from the chart below of drug
bellwether Johnson and Johnson (NYSE:JNJ).
Send your stock requests to Contact Support.
Please put the symbol of your requests in the subject line of
the e-mail.
----------------------------
Homework
After last week's brief discussion of trading books, I received
a flood of requests to elaborate upon my library. So I've
provided a few of my favorite reads below per readers' requests.
Hi Eric, which in your opinion is the best book to learn about
credit spreads (e.g. bull put-spread), as described by Jim in
Sunday's article, also in regards to butterfly spread. - Thanks,
Kurt
The two best books I've read on spread techniques were written
by Larry McMillan and Sheldon Natenberg.
To reiterate my view of Natenberg's Option Volatility & Pricing
from last week, it's an all-inclusive, one-stop options book,
which provides a solid foundation. Furthermore, Natenberg's
book brings a bit more of a professional twist. By that I mean,
the book is a bit more geared to on-floor traders.
Option Volatility & Pricing by Sheldon Natenberg
McMillan's Options As A Strategic Investment on the other hand,
is more geared to retail traders. McMillan's book brings
another aspect to the table that's a little different from
Natenberg's.
Options As A Strategic Investment by Lawrence McMillan
Could you recommend a good book on candlesticks please? Thanks
a bunch! - Sharon
Hi Eric. Read your write up on books on options. I shall be
taking your advise and ordering the book. I like to consider
myself a swing trader, i.e. 3-5 days position. Hence, I like
to depend on technicals. One of the concepts recommended in your
newsletter was candlestick charts. Apparently, there is a book
by a Japanese author listed on your bookstore. Do you recommend
the book? Thanks and regards, Mehdi
If you're looking for education on candlestick charting
techniques, Sharon and Mehdi, I would recommend reading Steve
Nison. I had the opportunity to meet Mr. Nison last fall at our
seminar in Denver and quickly realized that he is the authority
on candlestick charting methods. His two books will teach you
everything about candlesticks and the various nuances
associated with the old-school Japanese method.
Japnese Candlestick Charting Techniques by Steve Nison
----------------------------
PMC Sierra - PMCS (revisited)
I've made a few bad calls this year, and I haven't been shy in
admitting this much as my readers know. And for the readers
who've stayed with me, you might've received some redemption
last week.
In last weekend's column, I promised that I'd reverse my string
of bad calls. And while I probably didn't help my readers make
any money last week, I might have saved them some. If you
recall, I reviewed PMC Sierra (NASDAQ:PMCS) last week for our
long-time and highly esteemed reader, Sunil. He asked about
the idea of trading calls on PMCS and I offered the following:
"If Cisco is experiencing a slowdown, wouldn't it make sense that
PMC Sierra is also seeing a slowdown? After all, Cisco is one
of PMCS' largest customers."
"To be perfectly honest...I think the most prudent approach
would be to wait for PMCS' earnings report this Thursday.
Listen very closely to the guidance the company gives and pay
close attention to how the market receives its report."
My valued colleague, Matt Russ, and I were on the PMCS
conference call last Thursday evening. And I've got to tell
you that the call was one of the worst I've heard in quite
some time. It was pure badness! At one point, the PMCS
executives said something along the lines of the second
quarter being a complete tossup. What the hell is that? The
PMCS folks proceeded to say that their visibility for the
second quarter was non-existent. Ouch!!!
I've got to be honest with my readers, at one point during the
call, Mr. Russ and I were laughing at how bad it really was.
But our laughter subsided when we saw the reaction in shares
of Cisco Systems (NASDAQ:CSCO) and PMCS' competitors. We then
began to wax rational about the broader impact of PMCS' blowup.
Mr. Russ and I collectively feared the worst.
As it turned out, our fears were short-lived. And to keep with
my honesty policy, I was amazed at the Nasdaq's ability last
Friday to absorb the PMCS news. Aside from my efforts in
redemption, the REAL reason I wanted to revisit PMCS this weekend
was to reinforce how well the market is currently digesting bad
news. Furthermore, the rebound in the tech sector was confirmed
last Friday by the rollover in the drug sector, among other
defensive groups, as I previously alluded to in Johnson &
Johnson. And if last Friday's action is indicative of future
movements in the Nasdaq, I would speculate the dip down to 2700
in the COMPX marked a relative low ahead of the tech proxy's
advance to 3000. Which may happen very soon with cooperation
from the Fed next week.
----------------------------
Qualcomm - QCOM
Please advise your views on QCOM if the stock has commenced the
upwards trend? - Thanks, Sunil
Sunil, as always, thanks for providing such a good request. And
the reason I think shares of Qualcomm (NASDAQ:QCOM) provide such
a pertinent study currently is because of the stock's highly
visible head-and-shoulders top traced last winter. By my
judgment, I put QCOM's head at roughly $105 and its neckline at
roughly $80. Those numbers will vary among traders, but they'll
serve our purposes. Taking the difference from head ($105) to
neckline ($80) we're left with $25. Taking the difference of
$25 from the neckline ($80) we get a bearish price objective of
$55. And you'll notice that QCOM never reached that objective.
The lowest the stock recently traded was $67 and change - about
$10 off the objective. That may be close enough for the bears
in this case.
Qualcomm's earnings report was obviously well received by the
market judging by both volume and price action last Friday. The
stock emerged from a solid base off the $70 level.
Now that QCOM is sailing above its base around $70 - $75, on
big volume no less, I would expect the next major resistance
to be near the $85 level. As you can see on the chart below,
shares of QCOM have been loosely trading around a trend line
that began back in early August. The trend line has acted as
a site of support in the past, and may now serve the purpose
of resistance. If QCOM breaks above $85, I'd expect a quick
advance up to $90, if not $100.
----------------------------
Protein Design Labs - PDLI
PDLI what is the future for this stock? - Thanks, Sunil
Again, Sunil, thanks for the good timing. I chose another of
Sunil's requests because I think shares of Protein Design Labs
(NASDAQ:PDLI) will help to reinforce my earlier mantra of
rotations and cycles.
Last summer and fall, capital sailed into the biotech sector
as market participants took refuge from the ailing tech sector.
But since last winter, the mobile capital, as I refer to it,
has been flowing out of the biotech space and back into the
broader tech and finance sectors, along with retailers and
cyclicals, among others. So, what's changed in the biotech
business over the last three months? In my opinion, not much.
It's pretty much business as usual.
What has changed, however, is the participants' views on
sectors away from biotech. That is, with lower interest rates
ahead, the market is discounting improving business for tech,
finance, and the other groups already mentioned. As such,
those groups of stocks now serve as the most efficient places
to put capital to work - places where participants can expect
to make the most money.
However, if we're witnessing the beginning of a new bull market,
(In my opinion, we are) I wouldn't necessarily recommend
shorting the biotech sector. It's too hard to fight the
overwhelming trend!
And why do I put so much stress on sector movements? In my
opinion, the sentiment and flow of a stock's sector is just as
important as the individual company's underlying fundamentals,
when trading, of course. So with all that said, I would
suggest paying heed to the broader biotech sector when
gaming PDLI. And you'll notice on the charts below that both
the Amex Biotechnology Index (BTK.X) and PDLI are facing
severe down trends.
The questions with the BTK.X right here should be: Do you fight
the trend and game a breakout above its descending line? Do you
bet on a failure and short the BTK.X right here? Or, do you
sit on the sidelines and wait? In my personal opinion, I think
the best course of action is to stand aside. I think there
are other trades currently with similar reward potential but
less risk.
PDLI's chart does paint a conflicting picture. The stock, like
the BTK.X, is facing a nasty down trend. But, the near-term
picture is a bit more bullish judging by the flag formed last
week. If PDLI breaks out from its three-day consolidation, I
wouldn't be surprised to see the stock trade up to $80 or $90.
But I think the BTK.X will need to substantially breakout
for PDLI to substantially advance.
----------------------------
Cardinal Health - CAH
Hi Eric, thanks for doing such a great job helping us objectively
plan our trades. My question concerns a potential to short CAH.
Thanks in advance for your comments! - Frank
Frank, like those from Sunil, your request is perfectly timed.
Shares of Cardinal Health (NYSE:CAH) fit in nicely with my
idea of sector rotation and cycles. The stock has been a place
of solace since the dawn of the 2000 Bear ten months ago. By
the nature of its business, CAH is a defensive stock in times
of turbulence in the broader markets. And if I'm correct in
my idea of a new bull market emerging, it would make sense
that CAH would under perform over the next twelve to eighteen
months. But let me qualify that statement. I would expect CAH
to under perform, not necessarily get whacked.
Nevertheless, CAH may be a good short at current levels as we
can easily define risk and potential reward. If a trader were
to put on a short at current levels, a stop could be put in
place at $105. While the potential reward could be derived
from the head-and-shoulders top that appears to be forming on
the chart. Using the same process as the Qualcomm example
earlier, I'd put CAH's head at $105 and neckline at $90. The
difference being $15, and when subtracted from the neckline at
$90, gives us a bearish price objective of $75. In short, at
current levels, the risk of putting out some stock is $5 while
the possible reward is $15 (reward-to-risk ratio of 3).
And to quickly clarify, I have nothing against Cardinal the
company, in fact, I don't follow the firm that closely. Instead,
my ideas are based solely on sector rotation and the flows of
capital.
----------------------------
DISCLAIMER:
This column is an information service only. The information
provided herein is not to be construed as an offer to buy or
sell securities of any kind. The Ask the Analyst picks are not
to be considered a recommendation of any stock or option but an
information resource to aid the investor in making an informed
decision regarding trading in options. It is possible at this
or some subsequent date, the editor and staff of The Option
Investor Newsletter may own, buy or sell securities presented.
All investors should consult a qualified professional before
trading in any security. The information provided has been
obtained from sources deemed reliable, but is not guaranteed
as to its accuracy.
********************************************
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*************
COMING EVENTS
*************
For the week of January 29, 2001
Monday
======
None Scheduled
Tuesday
=======
Consumer Confidence Jan Forecast: 125 Previous: 128.3
FOMC Meeting, Day 1 Forecast: NA Previous: NA
Wednesday
=========
Agricultural Prices Jan Forecast: NA Previous: 0.0%
Oil & Gas Inventory 26-Jan Forecast: NA Previous: 44.7
GDP-Adv. Q4 Forecast: 2.30% Previous: 2.20%
Chain Deflator-Adv. Q4 Forecast: 2.10% Previous: 1.60%
FOMC Meeting, Day 2 Forecast: NA Previous: NA
Chicago PMI Jan Forecast: 43.00% Previous: 45.20%
New Home Sales Dec Forecast: 895K Previous: 909K
FOMC Announcement Forecast: NA Previous: NA
Thursday
========
Auto Sales Jan Forecast: 5.8M Previous: 5.8M
Truck Sales Jan Forecast: 6.7M Previous: 6.7M
Initial Claims 27-Jan Forecast: NA Previous: 316K
Personal Income Dec Forecast: 0.20% Previous: 0.40%
PCE Dec Forecast: 0.20% Previous: 0.40%
Construction Spending Dec Forecast: -0.50% Previous: -0.60%
NAPM Index Jan Forecast: 43.80% Previous: 44.30%
Friday
======
Nonfarm Payrolls Jan Forecast: 80K Previous: 105K
Unemployment Rate Jan Forecast: 4.10% Previous: 4.00%
Hourly Earnings Jan Forecast: 0.30% Previous: 0.40%
Average Workweek Jan Forecast: 34.1 Previous: 34.1
Factory Orders Dec Forecast: -0.50% Previous: 1.70%
Mich Sentiment-Rev. Jan Forecast: 94 Previous: 93.6
ECRI Future Inflation Jan Forecast: NA Previous: -6.1%
ECRI Wkly Leading Idx 26-Jan Forecast: NA Previous: -3.6%
Week of February 5th
====================
Feb 05 NAPM Services
Feb 07 Productivity-Prel
Feb 07 Consumer Credit
Feb 08 Initial Claims
Feb 08 Wholesale Inventories
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The Option Investor Newsletter Sunday 01-28-2001
Sunday 2 of 5
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TRADERS CORNER
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Protecting Your Backside Without Limiting Your Upside
By Lynda Schuepp
Collars are used by professional traders to protect their portfolios.
A collar is comprised of owning stock, owning a long put and being
short a call. Typically, the investor buys an at-the-money put or
slightly out-of-the-money put depending on one's risk tolerance and
sells an out-of-the-money call that is used to pay for the puts.
The investor's profits are protected by the put. In fact, the put
is nothing other than a protective put. If the stock tanks 10
points, the puts will go up in value almost dollar for dollar
because of an increase in volatility and increase in intrinsic
value. The short call is nothing other than a covered call on the
stock you own. By selling the calls against the stock, you can
actually pay for the protective puts. The only downside to this
strategy is if the stock runs away to the upside. The profits
would be limited to whatever the strike price is of the call, just
like in a covered call. How would you like to have to cake and
eat it too? Larry McMillan writes about a variation of this
strategy in his book, McMillan on Options, a book I would highly
recommend for any option trader interested in moving beyond simple
directional plays.
Instead of buying the same number of calls and puts as is done in a
conventional collar, you would buy enough puts to protect your entire
investment of stock, but you would sell only enough calls to pay for
the puts. An example is probably in order here.
Weekly Chart of AOL with 10-, 50-, and 200-period moving averages:
From the chart above, you can see that AOL has made a tremendous ride
up since the beginning of January. The stock has gone from $32 to $54
in one month! However, it has also come down from its high of $74 at
the end of March. AOL currently sits at the 10-period moving average,
which may be resistance going forward. If you had purchased the stock
back at the beginning of January at $32, you might be concerned about
protecting your profits. AOL closed at $54.59 on Friday. There are
many ways to create this trade but we will look at one. Looking out
as far as you can go, we would pick the Jan '03 options. On Friday,
the at-the-money puts (55 strike price) were selling for $11.40 and
the Jan '03 calls with a strike price of 60 were selling for
$14.40. The cost to protect the downside would be $11,400 based on
10 contracts. That would be pretty expensive insurance if you
didn't have any way to help pay for that. By selling enough Jan '03
60 calls to pay for the 55 puts, you would see that you would only
need to sell 8 contracts. Now if AOL goes down from here, you would
lock in your current profits. Let's see how that is calculated.
Summary of Important numbers:
Buy AOL at $32
Buy 10 Jan '03 55 puts for $11.40, total cost $11,400
Sell 8 Jan '03 60 calls for $14.40, total received $11,520
Scenario 1: If AOL goes down 20 points.
At $35, you could sell your put (for a profit) and buy back your
call (for a profit) and sell the stock (at a loss). The profits
from the options would offset your loss in the stock and probably
result in a small profit. This would not be the recommended course
of action. The recommended path would be to simply exercise your
put and buy back your short call. The net result would be that
minimally you would get $55 for the stock (the strike price of the
put) and make $23,000 for a stock (55 strike less 32 stock cost).
The cost to buy back the call would probably be about 6 points on
8 contracts or $4,800, based on current pricing. Note that the
protection cost you no money, but you still made $18,200! Not bad
for a stock that tanked 20 points.
Scenario 2: If AOL stays at $55.
At $55, the 60 call option and the 55 put would expire worthless and
you would get to keep the stock with the locked in profit from $32
to $55. You could then roll out the strategy and buy puts and sell
calls with longer expiration dates or sell the stock for the 23 point
profit and move on.
Scenario 3: If AOL goes up 20 points.
If AOL closes at $75 at expiration, your upside would be capped.
The puts would expire worthless but you sold 8 contracts of the
60 calls. That means that 800 of your 1000 shares would be capped
at $60 (the call strike), resulting in a $22,400 profit (60 strike
less $32 cost of stock times 800 shares). That is the risk of
covered calls, but 200 shares would not be capped and you would
realize the full profit on those 200 shares. Your profit on the
200 shares would be $8600. Therefore, your total profit would
be $31,000,which would be $12,000 less than if you simply held
the stock without any collar.
Remember, there is a price for protection, but as you can see in
this example, your downside protection exceeds what you give up
on the upside. It is important to understand when a strategy
should be used. This strategy should be used on stocks where
you have doubts that the stock can continue at the same rate of
upward growth or if there were a possibility that the stock could
tank. Examples of stocks like this would be stocks that ran up
because of a proposed merger but has the potential to fall
through, or drug stocks where a decision is impending regarding
approval of a new drug etc. In other words, stocks that are
expected to go sideways or slightly up but have a potential for
a big downturn. Every strategy has its risk/reward scenario
and is appropriate for certain market conditions. Learn which
strategy best fits for the current conditions and go for it.
*****
Another 50 Basis Point Rate Cut, Good News or Bad?
By Renee White
"If it seems too good to be true, it probably is." Strange voices
are whispering these words in my head. I hope they go away soon.
Two big rate cuts in one month should be good, right? Am I hearing
my own fear of uncertainty and caution for the near-term, or quiet
whispers from a market that may be near a short-term top? I'm not
sure, but I do know that thinking through the bigger picture helps
one's trading decisions.
Last weekend, I wrote that I was beginning to have confidence that
a 50 basis point rate-cut was in the works due to poorer than
expected economic reports released that week. After listening to
Mr. Greenspan's speech this past Thursday, I firmly believe this
now, as do many others. He is such an eloquent speaker, always in
control of a room that demands silence as people try to both
listen and understand his intent through his unique use of the
English language. At times though, I feel like his soft-spoken
words are actually screaming through the silent room. That is what
I heard this time and this is what concerns me. More on this later.
This has been an interesting week for traders. The second week of
earnings reports gave both the bulls and bears opportunities to
profit as I predicted. The tug of war that played out between
these two opinions should tell us a lot. For the week, NASDAQ
closed on a doji, which should make both sides cautious. The
market was ripe for profit taking; yet buyers continued keeping
the effects of selling barely noticeable. I was very impressed how
well it held up. I would have expected selling to be stronger once
it began but before lunch on Friday, caution was thrown out as
buyers showed up in the candy store again. I would have preferred
more fear going into the FOMC meeting this week, but there is just
too much money coming into the market right now, typical in
January. A healthy sell-off going into the meeting would have
had me playing for a short relief rally afterwards. However, a
weak pullback like we had along with buying going into the meeting
may give me a different set-up and one that I am still pondering.
Need a job? Selling unemployment insurance might be a good choice.
In a previous article, I mentioned that the post-earnings
conference calls would be important this earnings season. Leading
CEOs would be projecting their opinions of their own business
growth prospects, leading analyst expectations for 2001 lower or
higher. As expected, significant layoffs have been announced and
I doubt we have seen the end of it. In my local paper,
advertisements for bankruptcy sales have shown up in retailers
Montgomery Wards and select Palais Royal stores. Belt tightening
layoffs have recently been announced in several manufacturing,
retail and entertainment companies. Recent victims include:
WorldCom (NASDAQ:WCOM), JP Morgan Chase (NYSE:JPM), AOL/Time
Warner (NYSE:AOL), Lucent (NYSE:LU), Sara Lee (NYSE:SLE), and
JC Penny (NYSE:JCP), while Brunswick Corp (NYSE:BC), the world's
largest maker of pleasure boats, announced the closing of 4
plants. AMC Entertainment (AMEX:AEN) announced the closing of up
to 548 theatres in select areas and Loews Cineplex (NYSE:LCP)
continued banking negotiations on large loans that are teetering.
So, how bullish do you feel now? Doesn't sound good, does it?
Unfortunately, I expect many more in the weeks and months to come.
So much for a tight labor market! Still, layoffs are a very
effective cost cutting strategy. And cutting your leg off helps
you lose weight too.
In my local newspaper, a furniture store advertisement read: "No
Payments Till January 2003." Before I became a trader, I would
have jumped on that. Now I realize they are suckering people into
their own company financing. No payments all right, but the
interest keeps building up month after month for 2 years! What a
clever way to disguise locking customers into a high interest
rate (probably more than the company could make on CDs), right
when the Fed is aggressively lowering rates.
Isn't it funny how trading teaches you to look beyond the "for
sale" signs? At Christmas, Home Depot (NYSE:HD) had large 50% off
sales before Christmas, just weeks before they announced for the
second quarter in a row, of an earnings shortfall. In the future
when I first start seeing these things, I will think, "It's time
to do research and possibly buy the sale, short the stock." As
traders, we saw and felt the pain of economic weakness last year
while the general public went on their merry way oblivious to the
economic downturn to come. In fact, consumer confidence levels
have not yet felt the impact that these recent lay-offs will
certainly bring. The stock market is a leading indicator of
economic health. Consumer confidence is a lagging indicator. Their
fear and uncertainty usually peaks when the best sales and
bargains are all around. Great prices, but people will be
concerned enough to not want to take the bait. Besides, some of
these workers are sitting on expensive houses, bought with
inflated options from their tech employers, who are now cutting
back. Many are just learning what living on a budget really means.
That leads us to California, which may present an even bigger
problem soon. This state makes up a large part of our national
wealth and economy. A threatened real crash of that state's
economy, should have everyone's attention. Not only have their
luscious techs been hit with a sledgehammer, but also companies
with now deflated previously fat PEs, are being hit with an
energy crisis. Don't think it's over yet. Today I heard a
forecast of a hotter than normal summer on both the East and
West coasts this year. Summer air-conditioning anyone?
Yep, if I were in management out there, I would be investing
in headache medicine and possibly alcoholic beverages. Let's
review: decrease capital spending, inventory build-up, slowing
sales, slowing payments, profit margins being squeezed due to
sales and energy costs, orders lagging, too many expensive
workers hired at a premium when labor was tight and money was
easy, high electric bills with utility prices ready to explode
if the lights even stay on, and of course everyone is in a bad
mood.
Oh, should I mention that this is the current state of affairs
before they guided analyst's expectations down going forward?
Doesn't sound good, does it? Ever wanted to live in California?
Hold on, you may be able to pick up some real estate bargains
soon. I would think their real estate markets would go on red
alert once any large tech companies started relocating to other
states. Talk about a potential price deflation! Resolution of
this energy crisis is something all traders should keep an eye
on. I can't conceive a return to an enjoyable sustained bull
market run, if the economies of California and now potentially
New York, falter due to constant blackouts and energy concerns.
Welcome to the White House, Mr. President!
Which, all leads me back to Mr. Greenspan. His early January
abrupt 50 basis point rate cut was shocking because it came just
weeks after he jumped from an inflationary bias, to a recession
lookout. Six weeks earlier, he still maintained an inflationary
bias. What changed so quickly? I'm beginning to see how the dots
connect with this potentially serious economic crisis that could
occur if California's situation does not stabilize soon. Many
companies would be affected by defaulting loans, not just the
suppliers of gas. Since utilities are one of the highest
leveraged industries, banking problems due to loan defaults,
real estate, and a broad market down-turn with bankruptcies due
to profit margin squeezes from both electric bills and general
economic slow-down, is no small problem for an economy as large
as California's. You think the prices of movie tickets are high?
Think of their electric bills at those locations. Think of that
when you only see 5-10 people watching that movie. No wonder some
locations will close. This energy crisis would certainly affect us
all. With oil remaining high, natural gas reserves depleting, and
projected higher prices eminent throughout summer this year, and
a serious crisis in possibly more than one state, all coupled
with economic numbers that continue to show slower sales and
weaker growth for the near term, surely has Mr. Greenspan
concerned on a very deep level.
I found it interesting that he did not connect the dots for all
of us, but chose to speak on each of these areas separately. It
wasn't until he mentioned we were near zero growth right now, then
clearly stating that he was for an income tax rate cut, that I
hear his message become louder and louder. My interpretation was a
50 basis point cut was assured, but in addition, instead of
hearing that and feeling good, I heard it mentioned with a
quivering voice of concern.
Just like you can't have a recession in a tight labor market with
higher wages, you also can't have big growth if people are losing
their jobs, defaulting on loans, delaying orders and can't pay
their mortgages or rents regardless how cheap the credit, or how
low interest rates are. Making credit cheap quickly to assist
corporate loans, and adding liquidity in all forms, is the
reaction I think we are seeing here this January. It's like
pouring a bucket of water on an impending fire, instead of
squirting it with a squirt bottle. Will it work quickly enough?
Who knows? It may well be another few months before we know for
sure. But with a host of economic reports coming out this week
including the Employment Report, GDP, Consumer Confidence, and
the NAPM, I would caution traders from too aggressively loading
up with plays that they can't watch carefully. A 50 basis point
cut rally could be short lived, if followed by some shocking
economic numbers later in the week. If it is, just play the
downside.
All is not gloomy though. There is good news. Lots of money flowed
into the markets all week. Buyers were around every corner when
sellers were dumping. Bad news changed to good news and punishment
was short lived. Even Abby J. Cohen said she was over-weighted now
in technology. Thank you Abby! It was almost one year ago that she
under-weighted the sector and needless to say, few traders
listened. Perhaps we should listen this time. The other piece of
information that I hope everyone heard was Mr. Greenspan's
off-hand comment, something to the effect that this may just be
the 1st inning of our tech revolution, akin to the early 1900s.
I have always felt this, but hearing him say it at that important
time, reminded me that as long as we approach the markets with a
long-term perspective, we should be okay by choosing good solid
growth companies. Speculative trading of high-risk stocks, those
without proven track records, high PEs compared to their sectors,
and those who are still profitless, should only be played by very
aggressive traders who can watch their plays and recognize they
are speculating on short-term movements. Money can be made with
either attitude, but it is important to ask yourself what your
perspective is, and trade accordingly.
While I have you thinking, remember that techs are a sector that
helps lead out of a weakening economy, but it may be choppy for a
while before leadership is established. That means possibly a few
more months of range bound trading. This week, both defensive
issues and techs won in a bull and bear debate. This tug of war
will end soon, either by the techs rolling back over again for a
while, or by slowly starting to lead us out of the mud with
consistent strength through major resistance levels. As I said
before, I want to see how February plays out, before I'm convinced
our bottom is solid. Interest rate cuts starting in the global
markets would also give me more confidence. Until then, my radar
is still on alert for the near term.
I took profits on some shorts today and continued to hold others.
I have mixed feelings about the coming week. I'm still thinking
about CSCO's (NASDAQ:CSCO) earning's report due the following week
on February 6th. Will they beat again by a penny, or disappoint
the markets causing a sell-off? Does anyone remember the first
time DELL quit growing at 50% and the whooping they got when
they guided estimates lower to the mid 40% growth range? Trust
me, it was very ugly!
In the meantime, I'm making my list and checking it twice. Who
knows if a retest of lows will occur? I think it will though not
sure when. I will be very happy if I am wrong. A retest of recent
NASDAQ lows would find me buying those companies who beat their
earnings estimates and guided analyst with revised estimates
higher going forward from here. A tech that revises higher in a
weak economy sounds good to me! They should sink in sympathy with
the overall market on a retest of market lows. If they are
established companies, I'll add them to my long-term leap
portfolio. If they are newer, I'll pick off some deflated calls
for the next earnings cycle. If we rally hard from here and
defensive issues take a hit with money rotation, I will be
looking for entry points on natural gas opportunities.
Regardless of which way we go, next earnings season in April,
may still prove worse than this one before things turn around.
And remember, NASDAQ started falling well before April.
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**************************************************************
********************
THE PLAYS OF THE DAY
********************
Call Play of the Day:
*********************
GS - Goldman Sachs Group $114.69 (+3.75 last week)
See details in sector list
Put Play of the Day:
********************
PWER - Power-One, Inc. $45.00 (-0.25 last week)
See details in sector list
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************************************************************
**************************
PICKS WE DROPPED THIS WEEK
**************************
Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.
CALLS
SNPS $51.75 (-1.44) Overall, SNPS gave us a nice run from the
mid-forties to a peak of $56.50 on January 23rd. Unfortunately,
SNPS wasn't able to resume its run after profit taking earlier
in the week. On Friday, the share price slid under our $52
protective stop and finished in the negative. For now, the
momentum has sizzled and we're exiting the play this weekend.
Synopsis is expected to report earnings in late February.
EBAY $49.88 (-0.25) Mid-week, we saw investors push shares of
EBAY up to $55.13 on respectable volume; however, the 200-dma
capped the momentum. Our anticipation was for EBAY to make a
big breakout through the formidable resistance whilst
maintaining its position above the $50 level. But as it turned
out, negative sentiment took EBAY to $47.56 on Friday. Plain
and simple, there weren't enough interested buyers to give EBAY
the boost it needed to regain upside momentum; although some
analysts currently believe the stock is undervalued.
PLAB $32.75 (-0.88) After playing peek-a-boo with the $35
resistance line, PLAB fell victim to market conditions on
Friday. It's true that PLAB demonstrated some spunk with a
definitive rebound off the $32 exit level. However, its
inability to return to a respectable position above the
converged 5 and 10 DMAS, near $34, prompted us to close the
play. Time is money, so let's move on to more lucrative
opportunities. If you have open positions, sell into strength
as PLAB approaches the $35 level, which is currently serving as
a formidable line resistance.
AETH $51.44 (+2.38) While the bulls managed to keep AETH afloat
for another positive week, the picture is definitely becoming
more bearish for our play. The 50-dma turned out to be
impenetrable resistance, and the rollover from this level
picked up steam in the latter half of the week with negative
news coming from big names like GLW and PMCS. This pressured
the NASDAQ and helped to push AETH down as low as $45.63 on
Friday, well below our stop, and the real damage can be seen
in the Stochastics oscillator which has now dropped out of the
overbought zone. Despite an afternoon recovery that pushed our
play above the half-century mark, the bulls once again stopped
their charge at the 50-dma, allowing the stock to give back $3
in the final hour. With the violated stop and deteriorating
technicals, it is time to take our leave of AETH.
WCOM $21.31 (-0.69) We mentioned on Thursday that WCOM had been
bouncing off its key support (and our stop price) of $20
recently. While this level has so far held up, we are seeing
some early signs of weakness in the stock. First, the
stochastics have already begun to roll over. Although the stock
price has held up, this divergence, combined with moving average
resistance from the 10-dma (at $21.55) makes a move higher
difficult at best. Add to that an inability to definitively
break through and stay above its 100-dma ($21.31) and it appears
that the technicals have waned. With that, we are closing out
this play.
GX $21.68 (-3.19) The bottom fishing-buying in the telecom
carriers earlier this month ceased to exist last week as the
group pulled back in synch. We still like the major and regional
telecom carriers six months out, but the near-term may lead to
more consolidation. As such, we're dropping coverage on the
nice player of the group in the form of Global Crossing. The
stock has pulled back in recent sessions on light-volume profit
taking. And although the recent action is no more than a
natural reaction, we're moving onto better plays. Use any
lift above the $22 level early next week to close existing
positions.
ASYT $17.56 (-1.00) Following its disappointing earnings
announcement last week, ASYT was slapped with a downgrade by
AG Edwards. The downgrade induced a sharp gap down last Friday
which caused serious technical damage to our play. And although
ASYT rebounded into the close of trading, we don't like the
damage that has already been done. That said, use any bounce or
extension of short covering early Monday to exit positions.
PUTS
AT $59.88 (-7.88) We were a little disappointed and shocked last
Friday morning to discover AT was set to announce earnings. As
our OI readers know, we discourage holding positions over
earnings announcements in an attempt to minimize risk. We had
contacted the investor relations people at AT and had been told
the company wouldn't announce earnings until next week.
Unfortunately, we were mislead. Fortunately, the company didn't
please Wall Street during its conference call and the stock got
clobbered Friday. We're going to drop coverage on AT this
weekend and exit open positions early Monday in order to take
advantage of the big sell-off last Friday.
CHKP $154.94 (-5.13) Surprise! The bulls are back in town.
Before we even got a chance to play, the bulls charged onto the
scene, proving that the decline over the past two sessions was
merely profit taking. Opening at the low and closing at the
high is definitely a bullish sign, and when those two levels
are more than $10 apart, all bears should be on notice to head
back to their caves. Driving the sharp recovery was the
company's bullish outlook, which they presented at their annual
investor day on Thursday. The event was heavily attended, and
on Friday morning, analysts began gushing about how strong the
company's product demand is, despite a potential IT spending
slowdown. With such a strong move, we have no choice but to
step aside to avoid being trampled by the bulls.
***********
DEFINITIONS
***********
SL = Suggested stop loss. Sell if bid breaks this price.
OI = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume
The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.
Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;
Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"
Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.
RISKS of SELLING PUTS:
The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.
**************
NEW CALL PLAYS
**************
FLEX - Flextronics International $39.00 (+1.00 last week)
One of several "contract manufacturers" serving the
telecommunications, networking, consumer electronics, and
computer industries, FLEX provides its customers with the
opportunity to outsource a complete product. The company
takes responsibility for engineering, supply chain management,
assembly, integration, test and logistics management. FLEX
provides complete product design services, including electrical
and mechanical, circuit and layout, radio frequency, and test
development engineering services. Among FLEX's long list of
customers are Cisco, Hewlett-Packard, Lucent, Microsoft, Nokia,
Motorolla, and Palm Computing.
Contract manufacturers like FLEX have been recovering nicely
the past few weeks, and solid earnings certainly doesn't hurt.
Although the company only beat estimates by a penny on January
18th, the numbers were well received both by investors and
analysts. First Union was the first out of the gate,
reiterating their Strong Buy rating, and that was followed this
past week by upgrades from Robertson Stephens (Buy to Strong
Buy) and Morgan Stanley (Outperform to Strong Buy). The lone
dissenter is Merrill Lynch, who dropped their near-term rating
from Buy to Accumulate due to the recent rise, but kept their
long-term rating at a Buy. The bullish outlook helped the stock
to rally to the $38-39 resistance level before consolidating for
much of last week. The bulls came charging back on Friday
though, on news that ERICY would be outsourcing all of their
cell phone manufacturing to the company, and the stock rallied
sharply on volume 50% above the ADV. As companies attempt to
tighten their belts, the contract manufacturers are likely to
continue to see demand for their services increase, and that
means increasing revenue and profits. The $36 support level is
starting to solidify, and intraday dips have been contained at
$34.50. We are looking for a continuation of the rally next
week, so we are placing a tight stop at $36. Aggressive traders
can start to nibble at new positions on any intraday bounce near
this level, so long as the buying volume looks solid. As long
as buyers continue to support FLEX (and competitors JBL and
CLS), the stock looks like it could be getting ready to test its
highs near $45. More conservative traders will want to wait for
FLEX to top $39 on solid volume before taking a position.
BUY CALL FEB-35 QFL-BG OI=4752 at $5.38 SL=3.25
BUY CALL FEB-40*QFL-BU OI=4753 at $2.25 SL=1.00
BUY CALL FEB-45 QFL-BH OI=1834 at $0.88 SL=0.00 High Risk!!
BUY CALL APR-40 QFL-CH OI= 123 at $3.88 SL=2.25
BUY CALL APR-45 QFL-CI OI= 274 at $2.06 SL=1.00
http://www.premierinvestor.com/oi/profile.asp?ticker=FLEX
INCY - Incyte Genomics $30.63 (+4.81 this week)
Formerly known as Incyte Pharmaceuticals, INCY is a provider
of that hot commodity known as genomic information-based
products and services. The company focuses on providing an
integrated platform of information technologies designed to
assist pharmaceutical and biotechnology companies in the
understanding of disease and the discovery and development of
new drugs. The company's products include database products,
genomic data management software tools, microarray-based gene
expression services, and genomic reagents.
Biotech stocks have been in recovery mode lately, helped in no
small part by bullish news from industry leader AMGN. While it
came in a penny shy on earnings, the stock has been rallying on
news of a legal victory, and positive guidance on new drug
developments. This helped the Biotech sector to continue its
recovery, a wave that our new play, INCY has been riding
recently. Now up nearly 30% since its early January lows, the
stock has been riding the upper Bollinger band for more than a
week now, so we need to keep an eye out for profit taking.
Stochastics are buried deep in overbought territory, but
anticipation of the company's earnings report should keep the
stock moving strongly over the next several days. Due to the
proximity of earnings (confirmed for February 1st, after the
close), this will be a quick play, where we are looking to jump
onto the established trend and harvest a tidy profit. Intraday
support near $29 (also the location of our stop) needs to
provide a springboard for the stock to continue its rally into
earnings. And in order to keep it moving in that direction, we
will need the cooperation of the broader Biotech sector - watch
the Biotech Index (BTK.X) for confirmation that this trend is
still intact before playing. Aggressive entries can be
considered on a bounce from the $29-30 level, but conservative
players will want to wait for the stock to push through $31
before taking a position.
BUY CALL FEB-30*IPQ-BF OI=327 at $3.63 SL=2.00
BUY CALL FEB-35 IPQ-BG OI=160 at $1.56 SL=0.75
BUY CALL MAR-30 IPQ-CF OI=605 at $5.13 SL=3.00
BUY CALL MAR-35 IPQ-CG OI=144 at $3.25 SL=1.75
BUY CALL MAR-40 IPQ-CH OI=393 at $1.88 SL=1.00
http://www.premierinvestor.com/oi/profile.asp?ticker=INCY
QCOM - Qualcomm Inc. $81.00 (+10.63 last week)
Qualcomm Incorporated is a leader in developing, delivering, and
enabling innovative digital wireless communications products and
services based on the Company's digital technologies. As the
pioneer of Code Division Multiple Access (CDMA), the technology
of choice for next-generation wireless communications, Qualcomm
continues to lead the industry in the development of voice, data,
and wireless Internet products and solutions. Qualcomm is also
transforming industries through its various satellite businesses
and technology partnerships.
In the midst of report card season, this is a time when analysts
and shareholders alike take extra care in evaluating their
investments. With Qualcomm reporting earnings this past
Thursday, the market took a closer look and judging by its
reaction the next day (up over 7 dollars or almost 10 percent on
roughly twice the ADV), the prognosis is good. While revenue
figures for the quarter were considered light, earnings per share
came in at 29 cents per share, beating Street estimates by a
penny. During the conference call, CEO Irwin Jacobs said that he
expected further growth for the year with increasing focus on
third-generation CDMA. As an investor in GSTRF, news that the
satellite phone network service provider suspended its debt
payments acted as a lodestone, weighing down on QCOM's stock
price. Writing off the entire investment of $680 million was
seen as a relief. However, with $2.4 billion in cash and
marketable securities on hand, this was a loss that QCOM was able
to readily absorb. Friday's surge put QCOM back above three
moving averages, the 5, 100 and 200-dma, all converged in the
$76.50 area. A test of this key support level would provide
aggressive traders with an ideal entry point. As a precaution,
we are placing a protective stop just below at $76. A break
above its last major moving average of resistance, the 50-dma at
$82.70, could give conservative players a chance to jump in. As
QCOM is one of the top 10 stocks in the NASDAQ by virtue of
capitalization, keep track of movements the NASDAQ 100 (NDX, QQQ)
to ascertain sentiment in the large cap Techs
BUY CALL FEB-75 AAF-BO OI=11145 at $9.00 SL=6.25
BUY CALL FEB-80*AAF-BP OI=10322 at $6.00 SL=4.00
BUY CALL FEB-85 AAF-BQ OI= 8057 at $3.88 SL=2.50
BUY CALL MAR-80 AAF-CP OI= 2281 at $9.00 SL=6.25
BUY CALL MAR-85 AAF-CQ OI= 1060 at $6.75 SL=5.00
http://www.premierinvestor.com/oi/profile.asp?ticker=QCOM
COHR - Coherent, Inc. $52.25 (+6.00 last week)
Coherent is a global leader in the design, manufacture, and sales
of lasers, laser systems, precision optics and related
accessories. Founded in 1966, Coherent sells products in over 80
countries and today has 23 production, research, and service
facilities worldwide. Coherent is a world leader in the design
and manufacture of lasers and systems for commercial, scientific,
medical, and telecom markets. Coherent pioneered the development
of lasers used in medical applications 30 years ago and remains a
global leader and innovator in this market.
What makes COHR an interesting company to invest in is its
diversity when it comes to its laser products. Serving the
medical and well as the fiber optics industry, the company's
lasers have a wide range of uses from optical networking to body
hair removal. COHR reported earnings this past week, and it did
not disappoint. Beating the Street by 5 cents, the company
posted record quarterly results, with a gross profit up to 49.3
percent and a 91 percent increase in orders year-over-year.
Earlier in the year, US Bancorp Piper Jaffray gave COHR a Buy
rating and a price target of $65. While there are concerns over
sales in its medical division going forward, it appears that
traders are focused on the fiber. Since clearing its 100-dma
(now at $44.08), the stock has so far rallied on support from its
5-dma ($49.18). Look for a bounce off this moving average as a
potential opportunity for an aggressive entry. Support may also
be found at our stop price of $48. A break above its recent high
of $53.50 on increased buying volume would allow conservative
traders to take a position, but be aware that the 200-dma lies
just above, at the $55 level and could act as formidable
resistance. Keep an eye on GLW and JDSU to gauge the overall
health of the fiber optics sector. In the medical laser space,
peers EYE and QLTI could help in discerning investor interest.
BUY CALL FEB-50*HRQ-BI OI=341 at $5.75 SL=3.75
BUY CALL FEB-55 HRQ-BK OI= 77 at $3.00 SL=1.50
BUY CALL FEB-60 HRQ-BL OI= 65 at $1.69 SL=0.75
BUY CALL MAR-50 HRQ-CJ OI= 88 at $7.38 SL=5.25
BUY CALL MAR-55 HRQ-CK OI= 0 at $4.88 SL=3.00 Wait for OI!!
http://www.premierinvestor.com/oi/profile.asp?ticker=COHR
FDRY - Foundry Networks $22.88 (+4.00 last week)
Foundry Networks is a performance and total solutions leader for
end-to-end switching and routing including Internet routers,
Layer 2/3 LAN switches, and Layer 4-7 Internet traffic and
content delivery switches. Foundry's 3,000+ customers include
the world's premier ISPs and enterprises, portals, search
engines, e-commerce sites, and universities along with the
leading entertainment, pharmaceutical, government, financial, and
manufacturing companies. Some of these customers include: AOL,
EarthLink, AT&T WorldNet, MSN, and Cable & Wireless, Yahoo!,
LucasFilm, U.S. Army, Air Force and Navy, NASA and NIH.
A well-received earnings report, a strengthening Networking
sector, and oversold conditions have helped put shares of FDRY on
its way to recovery. After pre-announcing late last year of
slowing profit growth, shareholders exited the stock on mass but
it appears now that investors are willing to jump back in. The
company made up for its recent confessions by beating reduced
estimates when it posted results for the fourth quarter, with
sales revenue almost doubling year-over-year. What's more, the
company announced a stock repurchase program, which could mean a
reduction of float by as many as 5 million shares. In the near
term, the stock looks to be headed for the $30 level, with the
50-dma sitting just above at $32.14. Such a move would fill a
gap that was created this past December when the company's shares
fell on its earnings warning. Analysts are mixed on the stock,
with Robertson Stephens upgrading FDRY from a Long Term
Attractive rating to a Market Performer while Epoch Partners
issued a downgrade. What matters at this point is not what is
said but rather, the price/volume action, as the stock has been
advancing on increasing volume. FDRY ended the week on a high
note by closing up almost 4 percent on almost twice the ADV.
Pullbacks to the 5 and 10-dma (at $21.03 and $19.93 respectively)
could allow aggressive traders to take a position. Just make
sure that FDRY stays above our stop price of $20. If upward
momentum takes FDRY above resistance at $23.75, conservative
traders may enter, as long as the AMEX Networking Index (NWX) and
rival EXTR confirm upward momentum.
BUY CALL FEB-20 OUJ-BD OI=1249 at $4.50 SL=2.75
BUY CALL FEB-22.5*OUJ-BX OI= 993 at $3.13 SL=1.50
BUY CALL FEB-25 OUJ-BE OI=1261 at $1.94 SL=1.00
BUY CALL MAR-22.5 OUJ-CX OI= 175 at $4.63 SL=2.75
BUY CALL MAR-25 OUJ-CE OI= 304 at $3.63 SL=1.75
http://www.premierinvestor.com/oi/profile.asp?ticker=FDRY
MSFT - Microsoft Corp $64.00 (+3.00 last week)
Microsoft is the #1 software company in the world. They
develop, manufacture, license, and support a broad range of
software products including Windows operating systems, server
applications, the popular MS Office suite, and a Web Browser.
CEO and co-founder, Bill Gates still owns 15% of Microsoft.
We're beginning coverage on this software monster for its recent
technical developments and building momentum following the
company's solid earnings report on Thursday, January 18th.
Being a favorite amongst the tech investors and the NASDAQ's
rally are also pertinent factors too! MSFT opened strong at the
$60 resistance level on that succeeding Friday and accomplished
two major milestones thereafter. First, the stock closed the
trading gaps from October, November, and December's declines;
and second, it established a very bullish level of near-term
support at $61. Going forward, look for the momentum to
intensify and propel the share price higher. Friday's strong
close at $64, just a fraction from the intraday high ($64.31),
combined with the bullish volume levels indicates there could be
more buying on Monday, but wait until after amateur hour before
jumping into this momentum play. Of course, keep in mind that
taking entries on high-volume bounces from $61 or even the 5-dma
($61.89) can be more risky then buying into the momentum on
breakouts above $64 or the resistive 200-dma ($65.78). Stops
are always a good protective device to consider. Our stop loss
is currently set at the $61 mark. On the wire, there was a rush
of news this week about the Microsoft Corp getting hit by so-
called "denial of service" attacks. Nevertheless, the negative
press didn't thwart investors from bidding up shares of MSFT!
BUY CALL FEB-60*MSQ-BL OI=37298 at $5.38 SL=3.25
BUY CALL FEB-65 MSQ-BM OI=28698 at $2.13 SL=1.00
BUY CALL FEB-70 MSQ-BN OI=12259 at $0.63 SL=0.00 High Risk!!
BUY CALL MAR-60 MSQ-CL OI= 8843 at $6.63 SL=4.50
BUY CALL MAR-65 MSQ-CM OI=15625 at $3.63 SL=1.75
BUY CALL MAR-70 MSQ-CN OI= 4615 at $1.59 SL=0.75
http://www.premierinvestor.com/oi/profile.asp?ticker=MSFT
JPM - JP Morgan Chase $54.19 (+3.63 last week)
JPM is a premier international banking firm headquartered in the
US. It is a holding company for subsidiaries engaged in global
banking and investment. They offer services to corporations,
institutions, and the very wealthy. Recently they merged with
the Chase Manhattan Corporation.
On January 2nd, JP Morgan Chase opened for business! The mega-
merger and resulting 4Q earnings report of January 17th found
the stock's support level established at the $50 level. Last
week, shorter-term solidified at $52. Although most securities
firms are being cautious because of expectations for slower
growth in the world markets and general concerns about a cooling
market, JPM is currently trading at the higher end of its
spectrum. We're anticipating JPM can muster enough momentum to
make a big breakout in an advancing market, whether it be before
or after the Fed Meeting. Our objective is to play a momentum
wave and lock in gains on high-volume breakouts as JPM trades
above $55 and challenges the upper resistance at $59.19. Some
traders may want look for lower entry points below our $53 stop,
but that's a much riskier strategy. Other stocks in the coveted
financial circle to keep an eye on include Citigroup (C), Morgan
Stanley Dean Whitter (MWD), Merrill Lynch (MER), and Bank One
Corp (ONE).
BUY CALL FEB-50 JPM-BJ OI=14081 at $5.25 SL=3.25
BUY CALL FEB-55*JPM-BK OI=17182 at $1.88 SL=1.00
BUY CALL FEB-60 JPM-BL OI= 1942 at $0.56 SL=0.00 High Risk!!
BUY CALL MAR-50 JPM-CJ OI= 7962 at $6.25 SL=4.25
BUY CALL MAR-55 JPM-CK OI=13709 at $3.12 SL=1.50
BUY CALL MAR-60 JPM-CL OI= 3302 at $1.38 SL=0.75
http://www.premierinvestor.com/oi/profile.asp?ticker=JPM
****************************
New Low Volatility Call Play
****************************
CPN - Calpine Corp. $42.00 +1.56 (+4.31 last week)
Calpine Corporation is dedicated to providing customers with
reliable and competitively priced electricity. Calpine is focused
on clean, efficient combined-cycle, natural gas-fired generation
and is the nation's largest producer of renewable geothermal
energy. Calpine was founded in 1984 to participate in the new
power industry as competition was beginning to replace regulation.
After suffering serious losses amid the energy debacle in
California, shares of Calpine have been on the mend in recent
weeks and look as if they want to continue advancing. Perhaps
it's the reasoning that California, along with the rest of the
United States, is in serious need of electricity. And as a
leader in operating power generation facilities, Calpine stands
to take advantage of the increased demand for electricity. Add
the fact that the new administration in Washington is viewed as
energy-friendly, and we have the ingredients for a momentum-based
advance into earnings. Calpine is scheduled to release numbers
on February 6th, and the anticipation of strong results combined
with bullish guidance may continue to carry the stock higher.
New positions can be had at current levels early Monday morning,
after confirming strength in Calpin competitors including AES
and NRG. More conservative traders might wait for a volume-
backed advance past resistance at $44 before entering new
positions. We have set our protective stop at $39, and would
cease coverage on CPN if it were to close below that level.
BUY CALL FEB-35 CPN-BG OI= 725 at $7.75 SL=4.50
BUY CALL FEB-40*CPN-BH OI=3022 at $3.38 SL=4.50
BUY CALL MAR-45 CPN-CI OI= 407 at $3.38 SL=4.50
http://www.premierinvestor.com/oi/profile.asp?ticker=CPN
**********
DISCLAIMER
**********
Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html

The Option Investor Newsletter Sunday 01-28-2001
Sunday 3 of 5
To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/012801_3.asp
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******************
CURRENT CALL PLAYS
******************
ENE - Enron Corporation $82.00 (+8.75 last week)
Enron Corporation is an energy and communications company.
Enron's operations are conducted through its subsidiaries
and affiliates, which principally are engaged in the
transportation of natural gas through pipelines to markets
throughout the United States, the generation, transmission,
and distribution of electricity to markets in the northwestern
United States, and the marketing of natural gas, and commodities.
Enron is also involved in the development, construction and
operation of power plants, and the development of an intelligent
network platform to provide bandwidth management services.
Enron stayed flat on a day when most of the stocks in the
natural gas sector experienced some profit taking, which is a
sign of strength. Traders who bought at the mid morning
dip price of $81.13 could have taken a small profit, but
considering the stock's trend line, it is likely that we
will see further upward momentum continue next week. Enron's
volume is a particularly strong indicator, as the ten day
average volume is nearly 50% stronger than the three month
average volume. On Friday, CSFB raised their 2001 price
target to $128, and their earnings forecast to $1.80 per
share, citing the sustainability of current growth, as well
as improved capital margins. Enron's wholesale services
subsidiary has been the fastest growing area over the last
several years, and the company has also shown dramatic
growth in the electricity, natural gas, and broadband
communications area. The $82.50 level has proven to be very
tough resistance for four months, but Enron looks as if it
is determined to break through this level, and may just do
so with a little help from the natural gas sector. Intra day
support is found at $81, and a bounce off this level could
be a good entry point going forward. More conservative
traders might want to wait for a break above $82.50 on
strong volume, as this could lead Enron up to $85. Continue
to set stops at $78, and monitor others like WMB and CRP
for strength.
BUY CALL FEB-80 ENE-BP OI=3254 at $4.75 SL=3.00
BUY CALL FEB-85*ENE-BQ OI=1958 at $2.25 SL=1.25
BUY CALL MAR-80 ENE-CP OI= 189 at $6.75 SL=4.75
BUY CALL MAR-85 ENE-CQ OI=1714 at $4.50 SL=2.75
http://www.premierinvestor.net/oi/profile.asp?ticker=ENE
HAL - Halliburton Company $40.75 (+3.00 last week)
Founded in 1919, Halliburton Company is the world's leading
diversified energy services, engineering, energy equipment,
construction, and maintenance company. In 1999, Halliburton's
consolidated revenues were $14.9 billion, and it conducted
business with a work force of approximately 100,000 in more
than 120 countries.
The oil drilling and equipment sector experienced profit
taking today, as OIX.X dropped nearly one percent. However,
the solid upward trend which was established on January
19 is still in place, and support is strong at $40. HAL
is scheduled to report earnings Jan 30 after the market
close, and, with help from the oil sector, the stock is
poised to spurt into its earnings. The 200 dma of $41.83
is stubborn resistance for HAL, as it bounced off this
level on Thursday and Friday. However, most of the other
stocks in the oil and gas drilling and equipment sector,
including SLB, BHI and RDC are above their 200 dmas, and
HAL is likely to catch up. Earnings have been way above
expectations for the most part in this sector, as well as
in the integrated oil sector, as higher oil and gas prices
stimulate company spending on exploration and production.
In addition, companies have raised their expectations going
forward for the most part. Traders can take positions at
current levels, or at a clear movement above $42, which
could lead HAL up to $44 before earnings are released.
Remember to monitor OIX.X for strength before initiating
positions, and set stops at $40. Traders will want to
close positions prior to the market close on Tuesday.
BUY CALL FEB-35 HAL-BG OI= 420 at $6.25 SL=4.25
BUY CALL FEB-40*HAL-BH OI=3918 at $2.44 SL=1.25
BUY CALL MAR-40 HAL-CH OI= 432 at $3.63 SL=1.75
BUY CALL MAR-45 HAL-CI OI=1495 at $1.56 SL=0.75
http://www.premierinvestor.net/oi/profile.asp?ticker=HAL
RATL - Rational Software $50.38 (+3.51 last week)
Rational Software Corporation, the e-development software
company, helps organizations develop and deploy software
for e-business, e-infrastructure, and e-devices through a
combination of tools, services, and software engineering
best practices. Rational's e-development solution helps
helps organizations overcome the e-software paradox by
enhancing time to market while improving quality.
Rational may run the risk of being accused of irrational
exuberance, considering its strong performance over the
last week. Rational closed higher every day this week
except Wednesday, when it rested at support at $47.25, just
under the 10 dma of $48.38. A look at the monthly chart
shows that a bullish wedge pattern has been emerging since
January 16, with higher lows at $44.69, $46.75 and $47.25,
and strong resistance at $50.58. Considering the excellent
news which RATL released in their last earnings report, it
seems that the stock is a strong candidate to break above
resistance at $50.58. In an environment in which many
different technology companies have been warning of slowing
growth going forward, Rational's management team reported
their highest revenue growth rate ever, and even raised
their forecasts for the coming year. Since then, several
Wall Street firms raised their price targets going forward,
including Goldman Sachs and CSFB. Rational's market
capitalization of $9.6 billion puts the company in the
mid cap range, which allows plenty of room for rapid expansion.
In addition, the S & P mid cap index (MDY) has been in an
upward trend since early January, and is now well positioned
above its 50 and 200 dmas. Traders can take positions at
support levels of $49, or $50. Ideally, we are looking for
a breakout above $50.58, which may very well arrive this week.
Monitor the software index by watching stocks like MSFT and
ORCL for an indication of sector movement. Move stops to $48.
BUY CALL FEB-50*RAQ-BJ OI=523 at $4.75 SL=2.75
BUY CALL FEB-55 RAQ-BK OI=653 at $2.69 SL=1.25
BUY CALL APR-50 RAQ-DJ OI= 24 at $6.88 SL=4.50
BUY CALL APR-55 RAQ-DK OI=230 at $4.88 SL=2.75
http://www.premierinvestor.net/oi/profile.asp?ticker=RATL
ARBA - Ariba Inc $40.00 (+1.75 last week)
Ariba is a provider of Internet-based B2B e-commerce network
solutions for operating resources. Their Web-based procurement
software helps manufacturers, retailers, and distributors to
track and manage supply purchases over the Internet. Blue chip
clients include Dupont, Federal Express, and Hewlett-Packard.
ARBA continues to show progress as it recovers off the recent
lows of $30. Currently the $38 level, which also marks our exit
point, is buoying the stock on pullbacks. This level, which
correlates with the 10-dma line, offers the more aggressive
traders a nice launching pad; however a bold move through the 5-
dma ($39.54) provides better confirmation. If you do take a
more enterprising entry, be sure the buyers step in before
taking additional positions. The volume remained respectable
last week; although the current momentum may need a shot of
adrenaline going forward. ARBA needs to demonstrate a bit of
dynamism and battle the resistance at $43, $45. The ultimate
objective is for the stock to challenge January 11th's intraday
high of $47.25 and return to the higher trading levels above
$50. In the news this week,, Ariba and Vignette (VIGN) inked a
B2B strategic alliance to bundle their respective solutions
together and provide greater efficiency. To get a feel of how
the overall sector is responding to market conditions, keep an
eye on stocks like I2 Technologies (ITWO), WebMethods (WEBM) and
Commerce One (CMRC).
BUY CALL FEB-35 IRU-BG OI=2388 at $7.50 SL=5.25
BUY CALL FEB-40*IRU-BH OI=4942 at $4.50 SL=2.75
BUY CALL FEB-45 IRU-BI OI=9805 at $2.13 SL=1.00
BUY CALL FEB-50 IRU-BJ OI=4684 at $1.25 SL=0.50
http://www.premierinvestor.net/oi/profile.asp?ticker=ARBA
PFE - Pfizer, Inc $44.31 (+2.94 last week)
Pfizer develops, markets and manufactures technology-
sensitive products in the field of medicine. Pfizer is the
leading US maker of pharmaceuticals. It developed the ever
so popular anti-impotence drug, Viagra. They also are top
producers in Animal Health and Consumer Health care products.
Some brands you may be familiar with are BenGay muscle rub
and Visine eyedrops.
Last week, Pfizer investors bid up the stock's share price up in
front of the company's earnings' release on Wednesday. We added
the stock to our call list when we saw PFE wasn't selling on the
news, but instead was continuing to make significant advances.
The subsequent technical developments above the intersected 30,
50 & 200 DMAs, at the $43 and $44 levels, further defined PFE's
overall strength and traders' interest. Dominant leaders in the
industry, namely Merck (MRK) and Bristol Myers (BMY) also posted
solid earnings last week, which gave drug stocks across the
board a nice boost. Specifically, if a deep pullback were to
occur amid a declining market, the $43 level should keep PFE
afloat. If PFE broke down further and failed to resurface, we'd
quickly exit the play and move on. However, Friday's distinct
bounce off $44 provided the bullish confirmation we were looking
to attain. Going forward, the first line of opposition to
penetrate next week is at $46 and $47. And just a fraction
under the $50 level is PFE's 52-week record high at $49.25. For
those traders who err more on the side of caution, you may want
see PFE shatter these barriers before beginning new plays. And
if you have open positions at this time, consider locking in
gains as PFE approaches the $50 resistance. You can always jump
back into subsequent momentum.
BUY CALL FEB-40 PFE-BH OI= 2100 at $4.75 SL=2.75
BUY CALL FEB-45*PFE-BI OI= 7337 at $1.13 SL=0.50
BUY CALL MAR-40 PFE-CH OI= 912 at $5.50 SL=3.50
BUY CALL MAR-45 PFE-CI OI=18405 at $2.13 SL=1.00
BUY CALL MAR-50 PFE-CJ OI= 9650 at $0.56 SL=0.00 High Risk!
http://www.premierinvestor.net/oi/profile.asp?ticker=PFE
BRCD - Brocade Communications $108.38 (+3.88 last week)
Brocade Communications is a provider of Fibre Channel switching
solutions for Storage Area Networks (SANs), which apply the
benefits of a networked approach to the connection of computer
storage systems and servers. The company's family of SilkWorm
switches enables companies to cost-effectively manage growth in
their storage capacity requirements and improve the performance
between their servers and storage systems. This provides the
ability of increasing the size and scope of a company's SAN,
while allowing them to operate data-intensive applications,
such as data backup and restore, and disaster recovery on the
SAN.
We knew there was profit taking in the future for BRCD, but
after three consecutive days, we were beginning to wonder if
it was ever going to stop. It looked bad again on Friday
morning, with a gap below our stop and a recovery that ran out
of steam by the end of amateur hour. But then the bulls
charged, and boy did they charge! Stepping in to support the
price near $98, they spent the rest of the day driving BRCD
higher, allowing it to settle just north of $108. Those of you
that jumped in to grab the entry point are smiling now. While
resistance looms just overhead at $110-112, it was encouraging
to see the bulls stage such a solid rally in the face of the
bearish comments from Networking leaders like GLW and PMCS.
Demand for the company's SAN products seems to be strong,
despite fears of a slowdown in IT spending. Possibly factoring
into the sentiment towards the storage sector this past week
was a rock solid earnings report and conference call from
storage equipment leader EMC on Tuesday. Maybe things aren't as
bad as investors feared just a few short weeks ago? At any
rate, we want to play the short-term moves, and with that in
mind, let's pick some entry points. Although BRCD is a volatile
stock, and not for the faint of heart, there are more
conservative ways to play it; try buying the breakout over the
$112 level. For you more aggressive risk takers, look for any
bounce north of $100 to provide solid entries ahead of the
company's earnings announcement on February 14th.
BUY CALL FEB-105 GUF-BA OI= 823 at $12.50 SL= 9.50
BUY CALL FEB-110*GUF-BB OI= 3120 at $ 9.00 SL= 6.25
BUY CALL FEB-115 GUF-BC OI= 752 at $ 7.00 SL= 5.00
BUY CALL APR-110 GUF-DB OI=15650 at $18.00 SL=13.00
BUY CALL APR-115 GUF-DC OI= 535 at $15.75 SL=11.25
BUY CALL APR-120 GUF-DD OI= 1512 at $14.00 SL=10.50
SELL PUT FEB- 95 GUF-NS OI= 1025 at $ 3.88 SL= 5.75
(See risks of selling puts in play legend)
http://www.premierinvestor.net/oi/profile.asp?ticker=BRCD
EMC - EMC Corporation $79.06 (+1.75 last week)
EMC wants to be your storage solution. The company designs,
manufactures and markets a wide range of enterprise storage
systems, software, networks, and services. The company's
products store, retrieve, manage, protect and share information
from all major computing environments including mainframe, UNIX,
and Windows NT. With offices around the world and a 35% growth
rate for the first 9 months of the year, EMC is effectively
filling its role as the worldwide storage leader.
"I think I can. I think I can", you can almost hear EMC chant.
After a stellar earnings report last week, along with a bullish
outlook for the future, the enterprise storage leader is making
a mighty effort to crest its 200-dma ($79.94) as it continues
to recover from the December selloff that took the price all the
way down to $53. The company beat estimates by 2 cents, and
posted revenue growth just under 40%. Reading between the
lines, you could almost hear management saying "What slowdown?".
As we head into the FOMC meeting where the only question seems
to be how much of an interest rate cut we will get, look for
EMC to continue to shine. Once it crests the 200-dma, along
with the $80 resistance level, all its moving averages will be
in the rear-view mirror, and the bulls can take aim at
resistance at $85 and then $90. Support seems to be solidifying
near $75, so we are raising our stop to that level, and
aggressive traders can consider new entries on any intraday
bounce above there. Watch out for the bears, though. The
daily stochastics have now dipped out of overbought, and without
a move higher in the near term, downside pressure could begin to
build. More conservative investors will want to wait for a
decisive move through $80, backed by solid volume, before taking
a position. Although not a NASDAQ stock, monitor this index to
confirm positive sentiment is still intact. If the tech sector
rolls over ahead of the FOMC meeting, it will be tough for EMC
to buck the trend and march higher.
BUY CALL FEB-75 EMB-BO OI= 8294 at $7.25 SL=5.00
BUY CALL FEB-80*EMC-BP OI=10863 at $4.25 SL=2.50
BUY CALL FEB-85 EMC-BQ OI= 9951 at $2.00 SL=1.00
BUY CALL APR-80 EMC-DP OI= 9411 at $9.25 SL=6.50
BUY CALL APR-85 EMC-DQ OI= 4858 at $7.00 SL=5.00
BUY CALL APR-90 EMC-DR OI=12050 at $5.25 SL=3.25
SELL PUT FEB-75 EMB-NO OI= 5490 at $2.63 SL=4.25
(See risks of selling puts in play legend)
http://www.premierinvestor.net/oi/profile.asp?ticker=EMC
GS - Goldman Sachs Group $114.69 (+3.75 last week)
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments. GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.
Despite a little bit of profit taking towards the end of last
week, the rally in Brokerage stocks is still intact as seen on
the daily chart of the Brokerage index (XBD.X). Resistance
turned back the bulls near the $640 level last week, but if the
bulls can remain in control we could see a breakout in the week
ahead. GS is riding this uptrend and is itself attempting to
break over the $118 resistance level. Things were looking a
little dicey as the stock fell below the ascending trendline
($113) to touch $111.50 on Friday, but buyers stepped in to help
our play close back above our $113 stop by the close. The
recent upgrades from Merrill Lynch and Wit SoundView have
certainly helped, but have likely already provided all the
bullish incentive they can. Now all eyes are on the Fed, and
the bulls are hoping that Uncle Alan will give us a 50 basis
point rate cut a the FOMC meeting this week. The big question
is if that is already factored into the price of the stock. If
it is, then there could be a sell the news event, once it
becomes known. In the meantime, use intraday bounces near
support ($112-114) as a means to gain a more attractive entry
point, but don't try to catch a falling knife. A failure to
rally from current levels will spell a quick end to our play,
so make sure you play with stop losses. More conservative
traders will want to buy strength, initiating new positions
as GS crests the $118 level on strong buying volume.
Regardless of your entry strategy, keep an eye on the XBD.X to
help you gauge investor sentiment towards GS and other
brokerage stocks.
BUY CALL FEB-110 GS-BB OI=3185 at $9.25 SL=6.25
BUY CALL FEB-115*GS-BC OI= 844 at $6.25 SL=4.25
BUY CALL FEB-120 GS-BD OI=3627 at $3.88 SL=2.25
BUY CALL MAR-115 GS-CC OI= 20 at $9.25 SL=6.25
BUY CALL MAR-120 GS-CD OI= 49 at $6.88 SL=4.75
BUY CALL APR-120 GS-DD OI=1673 at $9.88 SL=6.75
SELL PUT FEB-110 GS-NB OI= 741 at $3.63 SL=5.75
(See risks of selling puts in play legend)
http://www.premierinvestor.net/oi/profile.asp?ticker=GS
RMBS - Rambus, Inc. $49.13 (+1.75 last week)
Rambus designs, develops, licenses and markets high-speed chip-
to-chip interface technology to enhance the performance and cost-
effectiveness of computers, consumer electronics and other
electronic systems. They license semiconductor companies to
manufacture and sell memory and logic ICs incorporating Rambus
interface technology, and market their products to systems
companies to encourage them to design Rambus interface technology
into their products. They have been aggressive in this respect,
licensing more than 100 patents to around 30 semiconductor
companies.
It's been said that the NASDAQ rallies on the backs of the
Semiconductors and the Biotechs. Strength in the Tech index this
past month can be traced directly to Semiconductor issues.
Despite words of caution about the Chip sector from analysts,
well-received earnings reports from companies such as BRCM and
LRCX have helped the sector to move higher. Despite a lack of
material company-specific news recently, RMBS has been one of the
leaders. While the company missed Street estimates in its
earnings report by a penny two weeks ago, the stock has found
willing buyers. It appears that the bad news had already been
priced into the stock. While RMBS succumbed to some minor profit
taking in the latter part of this week, key support levels are
continuing to hold. Having broken through 50-dma (now at $46.89)
resistance this past week, the stock has since found support at
that level along with the 10-dma at $47.63. Bounces off these
moving averages could allow aggressive traders to make a play, as
long as RMBS closes above our stop price of $48. If the buyers
return, taking the stock back above its 5-dma at $50.31, this
would allow conservative traders to initiate a play. Sector
sentiment will play a key role in RMBS' direction so make sure
that the Philadelphia Semiconductor Index (SOX) and Merrill
Lynch's Semiconductor HOLDR (SMH) are on you side before taking a
position.
BUY CALL FEB-45 BYQ-BI OI=1088 at $7.88 SL=5.75
BUY CALL FEB-50*BYQ-BJ OI=3495 at $5.00 SL=3.00
BUY CALL FEB-55 BYQ-BK OI=2499 at $3.13 SL=1.50
BUY CALL MAR-50 BYQ-CJ OI= 48 at $7.63 SL=5.25
BUY CALL MAR-55 BYQ-CK OI= 87 at $5.63 SL=3.50
http://www.premierinvestor.net/oi/profile.asp?ticker=RMBS
UBS - UBS Warburg $172.45 (-1.30 last week)
UBS Warburg is a business group of UBS AG, one of the largest
financial services firms in the world with 78,000 employees in
more than 40 countries. In the United States, UBS Warburg's
securities activities are conducted through UBS Warburg LLC and
PaineWebber Incorporated, U.S.-registered broker-dealers. The
firm is a leader in equities, corporate finance, M&A advisory and
financing, financial structuring, fixed income issuance and
trading, foreign exchange, derivatives and risk management. UBS
Warburg also offers a full range of innovative wealth management
services through PaineWebber, and provides private equity
financing through UBS Capital.
We've been patient with our call play in UBS for the past couple
of weeks, but we are looking for a major move in the near future.
After the sustained rally this past December, the stock has
traded between $160 and $176. That range has now tightened, with
support at $170 and resistance at $176 continuing to hold.
Connecting the highs and lows since late November reveals UBS'
upward trending regression channel. The almost month-long
sideways movement has allowed support to catch up to the stock
price. At this point the stock is right at the bottom of its
uptrend line. As well, UBS has been making lower highs this past
week, with volume drying up, resulting in a neutral wedge
formation. As a Financial stock, the FOMC meeting could act as a
catalyst to drive UBS' stock price. Now sitting right at
support, with the prospect of an improving fundamental picture
from lowered interest rates, this could set UBS up for a breakout
above resistance at $176. If this does indeed occur, with volume
backing the move, this is where conservative traders would most
likely want to enter this play. For those willing to take on
risk to enter at current levels, make sure that our protective
stop, placed at $170 holds, and keep an eye on other Financial
stocks such as BSC, LEH, MWD as an early-warning system of any
major moves.
BUY CALL FEB-170 UBS-BN OI= 7 at $6.70 SL=4.75
BUY CALL FEB-175*UBS-BO OI=68 at $4.00 SL=2.50
BUY CALL FEB-180 UBS-BP OI=24 at $2.40 SL=1.25
BUY CALL MAR-175 UBS-CO OI=11 at $7.10 SL=5.00
BUY CALL MAR-180 UBS-CP OI=40 at $4.80 SL=3.50
http://www.premierinvestor.net/oi/profile.asp?ticker=UBS
ITWO - I2 Technologies Inc. $57.25 (+3.56 last week)
ITWO is a global provider of intelligent eBusiness solutions for
supply chain management and enhanced business applications. On
June 12, 2000 ITWO merged with Aspect Development (ASDV) to
create one of the largest software providers for eBusiness and
eMarketplace solutions. TradeMatrix, its Internet marketplace,
provides an open digital community powered by i2's advanced
optimization and execution capabilities that help manufacturers
plan production and other related operations. Clients include
3M, Compaq, Ford and Nokia.
There may have been a slowdown in corporate spending, but ITWO
did not feel it. Faced with less working capital, companies had
been tightening their belts, yet there are areas in which their
dollars are well invested. Spending money to save money is one
such expenditure. It seems that businesses are focusing on
supply chain management as one key area that if streamlined, can
enhance profits greatly. ITWO's market leadership in this space
of B2B has allowed it to benefit handsomely, as could be seen in
their stellar earnings report. Breaking the billion-dollar sales
figure for the year 2000, total revenue was up over 95 percent,
substantially higher than that of previous years. License
revenues more than doubled and operating income more than
tripled. In the conference call, the company did not expect
slowdowns going forward despite any economic weakness. Analysts
impressed with the results, took turns congratulating the
company. This has helped ITWO's shares to rally strongly, as it
broke above its 50-dma (at $53.16) for the first time this year.
A bounce off this moving average, along with support from the
10-dma at $54.18 are potential entry points for aggressive
traders, as long as ITWO closes above our stop price of $55.
With the stock price now just below its 5-dma (at $57.35), a
break back above this point with conviction would allow for a
more conservative play. In both cases, keep close tabs on
Merrill Lynch's B2B HOLDR (BHH) and rival MANU before pulling the
trigger.
BUY CALL FEB-55 QYJ-BK OI=1381 at $6.50 SL=4.50
BUY CALL FEB-60*QYJ-BL OI=2891 at $4.50 SL=2.75
BUY CALL FEB-65 QYJ-BM OI=2317 at $2.81 SL=1.50
BUY CALL MAR-60 QYJ-CL OI= 45 at $8.13 SL=5.75
BUY CALL MAR-65 QYJ-CM OI= 549 at $6.38 SL=4.50
http://www.premierinvestor.net/oi/profile.asp?ticker=ITWO
MERQ - Mercury Interactive $94.94 (-0.44 last week)
As a provider of integrated performance management solutions
that enable businesses to test and monitor their Internet
applications, MERQ is looking for growing e-commerce demand to
continue to fuel its business. The company's products perform
such tasks as analyzing and eliminating Web site performance
bottlenecks and automating quality assurance testing. MERQ's
client base spans a wide range of industries including
Internet companies such as Amazon.com and America Online,
infrastructure companies Ariba and Oracle, as well as Apple
Computer, Cisco Systems and Ford Motor Company.
Not only did MERQ handily beat Street estimates by 4 cents per
share, but bullish comments from the company have powered the
stock higher. During the conference call, the CEO noted, "Our
visibility is the best ever. Our target market is much broader.
The demand for our products and services is significantly higher.
And our competitive position is strong than ever before." After
a nice run-up of almost 40 points early this year, shares of MERQ
have spent the week in consolidation mode, trapped between moving
average support from its 50-dma at $86.65 and resistance from its
200-dma at the psychologically important level of $100. With a
range of well over $10, bounces off support this week has made
this a highly tradable play. The sideways action of this past
week has given enough time for the 10-dma (at $89.42) to catch up
with the stock price. The 5-dma at $93.31 provides additional
support. At this point, it's make or break time for MERQ and
with that, we are moving our stop price up from $88 to $90. We
anticipate that with the stock will most likely make a large move
one way or the other. The most conservative play would be wait
for MERQ to take out $100 on volume before entering though a
break above $95 if peers BMCS and RATL are also moving higher
would could allow for an entry point. Higher risk players
looking to buy on a dip could target moving average support,
confirming bounces with buying volume.
BUY CALL FEB- 90 RQB-BR OI=692 at $12.38 SL= 9.25
BUY CALL FEB- 95*RQB-BS OI=898 at $ 9.63 SL= 6.50
BUY CALL FEB-100 RQB-BT OI=620 at $ 7.50 SL= 5.25
BUY CALL MAR- 95 RQB-CS OI= 0 at $14.50 SL=10.75 Wait for OI!!
BUY CALL MAR-100 RQB-CT OI=108 at $12.50 SL= 9.25
SELL PUT FEB- 85 RQB-NQ OI=956 at $ 4.38 SL= 6.50
(See risks of selling puts in play legend)
http://www.premierinvestor.net/oi/profile.asp?symbol=MERQ
BGEN - Biogen, Inc. $66.13 (+6.69 last week)
Biogen, Inc., winner of the 1998 U.S. National Medal of
Technology, is a biopharmaceutical company principally engaged in
discovering and developing drugs for human healthcare through
genetic engineering. Headquartered in Cambridge, MA, the
Company's revenues are generated from worldwide sales of Avonex
for treatment of relapsing forms of multiple sclerosis, and from
the worldwide sales by licensees of a number of products,
including alpha interferon and hepatitis B vaccines and
diagnostic products. Biogen's research and development
activities are focused on novel products for multiple sclerosis,
inflammatory, respiratory, kidney and cardiovascular diseases and
in developmental biology and gene therapy.
Positive announcements from the company have recently given a
boost to shares of Biogen. Posting a well-received earnings
report in which sales of its leading multiple sclerosis drug
Avonex reached record numbers, the stock also rallied on news
that Antegren, its treatment for Crohn's Disease, will soon be
entering Phase III trials. What's more, the company expects that
its Psoriasis drug Amevive, already in Phase III, to be
commercially available by mid-2002. Expanding the pipeline seems
to be a theme for the company nowadays, with the CEO anticipating
the number of drugs in its clinical pipeline to double this year.
For traders looking to capitalize on a potentially large move,
this could be the play to watch this week. Connecting recent
highs and lows reveals a pattern of higher lows and lower highs
on decreasing volume, culminating in a wedge formation. Such a
pattern suggests that a large move one way or the other may soon
come to pass. In light of this development, we are tightening
our stop price from $62 to $64. If volume returns to the buy
side, with BGEN rallying above the $68 level, this would allow
for an entry on strength. For higher risk players looking to get
in early, look for a bounce off the 5-dma at $65.47, along with
the $65 and $64 levels as possible targets for entry. In both
cases, correlate entries with upward movement in the AMEX Biotech
Index (BTK) and Merrill Lynch's Biotech HOLDR (BBH).
BUY CALL FEB-60 BGQ-BL OI=2303 at $8.00 SL=5.75
BUY CALL FEB-65*BGQ-BM OI=2457 at $4.25 SL=2.50
BUY CALL FEB-70 BGQ-BN OI=2226 at $2.00 SL=1.00
BUY CALL MAR-65 BGQ-CM OI= 144 at $6.50 SL=4.50
BUY CALL MAR-70 BGQ-CN OI= 416 at $4.13 SL=2.50
http://www.premierinvestor.net/oi/profile.asp?ticker=BGEN
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DISCLAIMER
**********
Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html

The Option Investor Newsletter Sunday 01-28-2001
Sunday 4 of 5
To view this email newsletter in HTML format with embedded
charts and graphs, click here:
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*************
NEW PUT PLAYS
*************
SPW - SPX Corporation $112.94 (-3.00 last week)
SPX Corporation is a $2.7 billion global provider of technical
products and systems, industrial products and services, service
solutions and vehicle components. SPX has operations in 19
countries with the worldwide headquarters in Muskegon, Michigan.
The company designs, manufactures and markets fire detection
systems, data networking equipment, broadcast antennas and
automatic fare collection systems. SPX Corporation also designs,
manufactures and markets power transformers, industrial valves,
electric motors, and components for the light and heavy duty
motor vehicle markets.
An option trader who looks at SPW's daily chart will have a hard
time resisting the temptation to buy a put. The downward channel
which commenced in September has taken SPW all the way from its
52-week high of $186 to a low of $94 in December. One catalyst
may have been SPW's earnings release for the September quarter,
which showed net revenues down by 1%, as well as overall weakness
in the capital goods and automotive parts sectors. In December,
SPW's CEO stated that their earnings growth in a slowing economy
would be closer to 10% than the 15% originally projected. While
SPX rallied from $97 to $116.75 in the two weeks following the
rate cut announcement, the stock's underlying technical weakness
stopped the rally in its tracks this week. After a failed
attempt to break the downward channel by rallying to $116.75 on
Monday, SPW rolled over to $112 on Wednesday. On Wednesday, the
stock formed a lower high at $115.81, and rolled over once more.
Friday's chart pattern shows a very round roll over from $114, and
a quick rebound from the 50 dma of $112.29, which is not likely
to last. The path of least resistance for SPW is clearly down,
and a roll over from $112.94 looks highly probable. A break
below the $112 level on strong volume would be a good put entry
point, and would likely lead to the next support levels at
$111 and $109. Watch others in the capital goods sector like
TYC for an indication of sector strength, and set stops at $115.
SPW is scheduled to report earnings on Feb. 13, so traders have
plenty of time before this date.
BUY PUT FEB-115 SPW-NC OI=0 at $7.63 SL=5.25 Wait for OI!
BUY PUT FEB-110*SPW-NB OI=0 at $4.88 SL=3.00 Wait for OI!
http://www.premierinvestor.net/oi/profile.asp?ticker=SPW
WFII - Wireless Facilities Inc $38.00 (+2.75 last week)
Wireless Facilities is in the outsourcing business. They offer
planning services, design, and the actual deployment of wireless
networks. They work with all major broadband and Internet
wireless technologies and provide on-going related network
management services, which includes day-to-day maintenance.
They operate on a global basis and have blue-chip clients that
include AT&T, Lucent, Motorola, Siemens, and Qwest.
Considered a member of the Capital Goods Industry, Wireless
Facilities got the shakedown from investors last week after a
grand attempt to breakout. Technical and momentum traders
initially took WFFI upwards to the $45 level, but the stock
couldn't hold the gains. It quickly fell from the limelight and
returned to sub-trading below the $40 resistance. The
increasing energy costs are just too much of a burden on future
revenues. As a result, many like companies are warning of lower
earnings; especially with no relief in sight! Another
dissenting component regarding WFII is it's California presence
- and everyone's heard about their devastating energy crisis!
We're looking for this stock's price to fall victim to the
negative sentiment currently effecting the sector and it's own
technical breakdown to generate additional downward momentum.
WFII recently confirmed it's reporting 4Q earnings on February
14th, after the market close, so keep this mind as you
strategize your plays. Now from a technical perspective, WFII
is below the 50-dma and is on the verge of violating the
converged 30 & 10 DMAs, at $37. There is some support at $35;
therefore, it may be better to wait for WFII to move to the
underside of this level before buying into a decline. But if
you're willing to take a bit more risk, a reasonable entry point
might be found on a high-volume rollover from $40 and the 5-dma
($40.70). We've initiated a protective stop loss at $41 to
guard against a technical bounce.
BUY PUT FEB-40*QUU-NH OI= 92 at $5.00 SL=3.00
BUY PUT FEB-35 QUU-NG OI=146 at $2.56 SL=1.25
BUY PUT FEB-30 QUU-NF OI=357 at $1.06 SL=0.00 High Risk!
http://www.premierinvestor.net/oi/profile.asp?ticker=WFII
*****************
CURRENT PUT PLAYS
*****************
NKE - Nike Inc. $53.00 (-0.13 last week)
Nike Inc. designs, develops and markets high quality footwear,
apparel, accessories and equipment products. Nike is the largest
seller of athletic footwear and athletic apparel in the world.
the company sells its products to approximately 19,000 retail
outlets in the U.S., and through a mix of independent licensees,
distributors, and subsidiaries in approximately 140 countries
around the world.
Nike attempted to move above resistance at $54.38 three times
this week without success. The third roll over at this level
places Nike right in the middle of the downward channel which
was established after a failed attempt to rally past $60 on
January 9. After reporting second fiscal quarter earnings which
met expectations on December 19, Nike's CEO stated that he
expected to see the profit range for the following quarter in
the 50 to 55 cents range, which was lower than the First Call
consensus of 58 cents. Management stated that Nike expects
to see their profits pick up in the second half of 2001, but
they expect the current quarter growth to stay flat from the
year ago quarter. There is little short term bullish momentum
for the stock price at this point. Nike looks as if it is
ripe to roll over from the 5 dma of $53.38, which would likely
lead to the next support level at $52. A break below $52
would be a very bearish indicator, and a good entry point.
If the pattern continues, Nike will likely drop below the 50
dma of $50.35 in the near future, and conservative put players
may want to wait for this drop. The next support levels after
that are $48, and $46.69, which could likely be visited. It can
be helpful to monitor other athletic footwear companies like
RBK and SCNYB for an indication of sector strength. We are
moving our stop price down to $54, as a break above this level
could mean that NKE had regained strength.
BUY PUT FEB-60 NKE-NL OI= 93 at $7.63 SL=5.50
BUY PUT FEB-55*NKE-NK OI=3097 at $3.88 SL=2.50
http://www.premierinvestor.net/oi/profile.asp?ticker=NKE
AGIL - Agile Software Co $42.81 (-2.13 last week)
Agile develops and markets product content management software,
which is software that enables companies to collaborate over the
Internet by interactively exchanging information about the
manufacture and supply of products and components. Agile's
collaborative suite of software products is designed to improve
the ability of all members of the manufacturing supply chain.
Since their start in 1996, they have licensed their products to
approximately 300 customers including Gateway, Texas
Instruments, Lucent Technologies, and Solectron. About 40% of
sales come from additional material procurement applications,
consulting, implementation, support, and training services.
We began coverage on AGIL due to its subsequent breakdown below
the $40 level. Although it's important to note that this put
play engages a high level of risk in that other stocks in the
sector are actually faring quite well under the current market
conditions. For instance, leading Internet software stocks
Ariba (ARBA) and I2 Technologies (ITWO) are sustaining the
higher trading range for their respective price levels.
Therefore, it's especially important to pay attention to AGIL's
individual price/volume activity if you take positions in this
put play. Entries into the decline will ultimately depend on
your personal risk portfolio; although a more conservative
approach is to enter as AGIL resumes a downtrend under the $40
level or on a high-volume rollover near the 5-dma ($42.36). If
you take a look at a chart with a 30-dma line, you can visually
confirm how this technical measurement has kept a tight lid on
any rallies, so far. Traders might find an aggressive entry
around $44 or $44.50, but beware of a breakout through $46.
Recently, $46 marked the high end of the stock's narrow
consolidation range ($43 to $46). No matter how you plan to
execute your entries and exits, it'd be wise to use protective
stops to guard against the type of run ups we saw in Friday's
session. Our stop is set firmly at $44. We'll exit the play if
AGIL closes above this mark.
BUY PUT FEB-45*AUG-NI OI=110 at $7.13 SL=5.00
BUY PUT FEB-40 AUG-NH OI= 77 at $4.38 SL=2.75
BUY PUT FEB-35 AUG-NG OI= 14 at $2.44 SL=1.25
http://www.premierinvestor.net/oi/profile.asp?ticker=AGIL
IDTI - Integrated Device Tech. $46.81 (-3.44 this week)
Integrated Device Technology designs, develops, manufactures
and markets a broad range of high-performance semiconductor
products. The company serves up products for data networking
and telecommunications equipment such as routers, hubs,
switches, cellular base stations, storage area networks,
networked peripherals, servers, and personal computers. About
70% of sales are from communications and high-performance
logic components such as embedded RISC microprocessors,
specialty memory, logic and clock management circuits, and
networking devices.
Proving that they might be down but not out, the bulls came
back on Friday in a buying mood. Although you can't really
see that from the paltry gain on the NASDAQ, in light of the
bearish comments from GLW and PMCS this past week, it is
amazing that the Networking (NWX.X) and Semiconductor (SOX.X)
sectors managed to hold their ground on Friday. IDTI had been
slowing its descent, and on Friday managed to reverse its early
loss to post a $1.25 gain. While the white candle was a
refreshing pause for the bulls, we would caution them to not
get overly excited. The upward move ran out of steam near the
end of the day near the $47.50 resistance level. This could
turn out to be a tasty entry point for new positions, especially
if there is no follow through on Monday. Aggressive traders
may even get a better entry if buyers push the price closer to
our $50 stop before they run out of steam. With significant
historical resistance at this level, the bulls will have to
muster a lot of conviction ahead of the FOMC meeting in order
to push through it. Friday's bounce came right at $42 support,
and more conservative traders will want to see the price fall
through this level before initiating new positions. The
stochastics still have a ways to fall before reaching oversold,
and given the current market sentiment, this should help to
drag the price through the next level of support near $40,
also the site of the 30-dma and 50-dma. Use the SOX.X and
NWX.X to gauge investor sentiment before playing.
BUY PUT FEB-50 ITQ-NJ OI=785 at $6.25 SL=4.25
BUY PUT FEB-45*ITQ-NI OI=621 at $3.25 SL=1.75
BUY PUT FEB-40 ITQ-NH OI=943 at $1.63 SL=0.75
http://www.premierinvestor.net/oi/profile.asp?ticker=IDTI
PWER - Power-One, Inc. $45.00 (-0.25 last week)
Power-One is one of the ten largest power supply manufacturers in
the world, excluding the personal and consumer markets. Products
include DC rack-power-systems for telecom and Internet Service
Providers (ISPs) and embedded OEM power supplies for
communications equipment manufacturers. Management expects that
70-75% of Q4 sales will be to the communications industry.
Power-One also supports key customers in the semiconductor-test
capital-equipment industry and other high-end industrial markets.
Technical weakness in a strengthening market is just one of the
reasons that landed PWER in our put play list. Despite reporting
record earnings, the stock failed to test the 200-dma (now
sitting at $54.15), with investors selling the stock on volume.
Since then, PWER has slipped back below the 50-dma (at $48.33).
The recent failed rally corresponds to a downtrend line that can
be traced back to October of last year. While many NASDAQ stocks
have already broken above this level, PWER remains mired in its
downtrend. During the conference call, the CEO mentioned that
the company would be looking towards an acquisition strategy
going forward. Investors appear to be spooked by fears of share
dilution. Connecting the lows for the month reveals a short-term
uptrend line. Having fallen below this support level on
Thursday, PWER encountered resistance at this very point.
Currently, the stock is not only below all its major moving
averages, also but its 5 and 10-dma (at $47.36 and $45.60
respectively). Failed rallies above moving average resistance
from the 5, 10 and 50-dma could allow aggressive traders to
enter, confirming a rollover with the return of selling volume.
We are placing a protective stop at $48. To ensure continued
downward momentum, we would like to see PWER staying below this
level. For an entry on weakness, look for a break below current
levels on volume, with competitors BLDP and FCEL also moving
lower.
BUY PUT FEB-50 OGU-NJ OI=114 at $7.38 SL=5.25
BUY PUT FEB-45*OGU-NI OI=292 at $4.38 SL=2.75
http://www.premierinvestor.net/oi/profile.asp?ticker=PWER
********************************
WEEKLY UPDATES FOR VARIETY PLAYS
********************************
LONG-TERM:
SUNW $31.19 +0.00 (+0.31 last week) SUNW has steadily climbed
since we picked it on December 20th. Trending higher with the
broader NASDAQ, SUNW has advance slowly. But that's alright
because the premise of this Long-Term play is to obtain
attractive entry points into quality issues that we expect to
perform well in 3 to 6 month time horizon. This week SUNW
tested and held support at $30, which is also our stop loss on
the play. Entry points can be obtained on bounces from that
level. Looking overhead, the descending 50-dma at $34.92 will
be a challenge. In addition, on January 18th, SUNW ran up to
a recent high of $35.13 before its earnings report, so sellers
may be hiding at the $35 level.
BUY CALL MAR-35 SUX-CG OI=2730 at $1.56 SL=0.75
BUY CALL APR-35*SUX-DG OI=8184 at $2.75 SL=1.25
http://www.premierinvestor.net/oi/profile.asp?ticker=SUNW
LU $18.00 +0.00 (-2.56 last week) Profit takers came for their
hard earned money in LU this week after peaking on Friday the
19th at $21.13. Yet, this is not totally unexpected considering
LU's fantastic run that started at the end of the year. Having
taken LU for a ride since $14.50, slight pullbacks like this are
opportunity to enter this Long-Term play. On a positive note,
LU's greater-than-expected losses last Wednesday were absorbed
rather well by the stock, indicating that much of the bad news
is already priced in. The company's cost-cutting efforts by
laying-off 10% of its workforce is good news for Wall Street
but bad news for Main Street. With the 50-dma beginning to
flatten out, LU has that support at $17.30. In Friday's action,
buyers stepped in around that level to bring the stock back to
$18. Overhead, resistance will be encountered at the 100-dma
of $23.25. Our stop remains at $16.50.
BUY CALL FEB-15 ULU-BC OI=9315 at $3.50 SL=1.75
BUY CALL MAR-15*ULU-CC OI= 99 at $3.88 SL=2.50
BUY CALL MAR-20 LU-CD OI=8961 at $1.13 SL=0.50
http://www.premierinvestor.net/oi/profile.asp?ticker=LU
GE $44.63 -1.31 (-2.38 last week) While it has been a concern
that GE has not responded to the interest rate cutting environment
like many of the other diversified stocks, we are still positive
on this bellwether in the long-run. A Fed easing of rates will
eventually be reflected in GE's stock price, however, right now
there appears to be some downward pressure stemming from the HON
deal, expected to close in March. On January 17th, GE reported
record results for earnings, revenues and cash generation, proving
that its emphasis on globalization, diversification and growth in
services is paying off. Technically, the $44 level is good support
yet our stop is set at $43 to allow for leeway in this Long-Term
play. The downtrending 50-dma lies at $49.33. Options are
reasonably priced for GE.
BUY CALL MAR-45 GE-CI OI=5646 at $3.00 SL=1.50
BUY CALL JUN-50*GE-FJ OI=8859 at $2.69 SL=1.25
http://www.premierinvestor.net/oi/profile.asp?ticker=GE
LOW VOLATILITY:
ACF $34.94 +0.88 (+1.94 last week) ACF has been our best performer
this month as a Low Volatility play. Since the Fed rate cut on
January 3rd, this lender has benefited quite nicely and will likely
perform well in this current interest rate environment. ACF
continues to trend upwards with simple consolidation ahead of its
next up move. Right now, resistance lies at $35. While the stock
looks like it may consolidate after Tuesday's move through $34,
the Fed's actions this Wednesday could very well boost ACF through
$35. Look for entry points on pullbacks ACF's recent base near
$33.50, also the site of the 10-dma. A run-up into the Fed meeting
could be played if the stock breaks through $35 with strong volume.
BUY CALL FEB-35*ACF-BG OI=3105 at $1.94 SL=1.00
BUY CALL MAR-35 ACF-CG OI= 0 at $2.94 SL=1.50 Wait for OI!
http://www.premierinvestor.net/oi/profile.asp?ticker=ACF
BBY $47.50 +0.31 (+4.69 last week) BBY has been ascending from its
depths of December, especially helped by the interest rate
environment. This play looks promising from both a fundamental and
technical standpoint. Loosing monetary policy should have positive
implications for consumer spending. And the prospects of a tax cut
in the near future would bode well for retail stocks as disposable
income increases. Technically, BBY has solid support at $41, but
the converging 10-dma and 100-dma at $44.75 and $44.30, respectively
offer support closer to its current level. A pullback to this $44-
$45 level would present a nice entry point. Also, a break above
intraday resistance at $48 could attract buyers.
BUY CALL FEB-45*BBY-BI OI= 519 at $4.38 SL=2.75
BUY CALL MAR-50 BBY-CJ OI=1610 at $3.63 SL=2.00
http://www.premierinvestor.net/oi/profile.asp?ticker=BBY
CNC $17.94 +1.50 (+3.88 last week) What a run last week! CNC
just blew up. While many of the larger insurance concerns sold
off this past month and are now rebounding, CNC has remained
very consistent and steady. This is in part due to their
diversified products outside of insurance, including investments
and managed assets. Fundamentally, CNC is poised to perform well
especially with an expected rate cut coming this week, and more
in the near future. To play this Low Volatility call, look for
a pullback near the 10-dma at $15.19, which might be too
opportunistic considering CNC could rally into the Fed meeting
on Wednesday. Buyers showed up on Thursday at $15.50, but
Friday they were back earlier at $17. A break above $18 would
also warrant entry on strong volume.
BUY CALL FEB-15 CNC-BC OI=9944 at $3.25 SL=1.75
BUY CALL MAR-15*CNC-CC OI= 301 at $3.75 SL=2.25
http://www.premierinvestor.net/oi/profile.asp?ticker=CNC
TYC $62.13 -0.06 (+1.06 last week) Another diversified company
was added this week for the same reason as the others: favorable
interest rate environment. TYC has broken out above long-term
resistance of $60, to boot. We will watch for this stock to
see how it reacts before and after the Fed meeting this week.
Volume has been robust during TYC's ascent since the January rate
cut. To play this, look for pullbacks to the $61 level, which
also happens to be near the 10-dma at $60.75. With TYC at all-time
highs, watch for increased buying interest with strong volume and
a break out above $63, the area in which sellers showed up on
Friday.
BUY CALL FEB-60*TYC-BL OI=18999 at $3.50 SL=1.75
BUY CALL MAR-65 TYC-CM OI= 4049 at $2.25 SL=1.00
http://www.premierinvestor.net/oi/profile.asp?ticker=TYC
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*****
LEAPS
*****
In An Uncertain Market, Money Management Is Critical
By Mark Phillips
Contact Support
Have you been profiting from some of our recent LEAPS plays?
More importantly, have you been locking in those profits with
judicious use of stop losses and profit targets? In case you
haven't noticed this is not the market we enjoyed a year ago,
and with all the economic concerns facing investors, we are not
so lucky as to watch our favorite stocks double in the space of
a few weeks without profit taking coming around to take a big
fat bite out of those gains.
Just because we have lots of time value in our LEAPS doesn't
mean that we shouldn't lock in our profits when the stocks
become overextended. Taking profits leaves us in a cash-rich
position, so that we can take advantage of the next entry point
rolls around. Even more important, it keeps us from letting a
winning trade become a loser, when conditions take a downward
turn. Ok, I know that money management isn't the most exciting
topic, but if you are still reading this, instead of scrolling
straight down to the plays, you understand that it is THE MOST
IMPORTANT DIFFERENCE between profitable trading and frustration.
Let's look at a couple of recent examples, so that we can insure
we get to keep our profits in the future. In mid-September, we
added QCOM back onto our playlist when it was consolidating near
$66. After awarding vigilant traders with a couple of juicy
entry points, the stock took off and by early December had
rocketed over the century mark and spent the better part of a
week stretching the upper Bollinger band. At the same time,
both daily and weekly stochastics had moved into overbought
territory. This upward move was accompanied by a sharp increase
in volume, and when it began to fall off, prudent investors
should have ratcheted their stops up near the $95 support level
to prevent giving back their profits. Sure enough, QCOM entered
a sustained 8-week downtrend from which it is just beginning to
emerge. Our 2002 LEAP increased in value to more than 100% over
our initial price before falling back very near where we
initially selected it, and the stock is once more ready for
fresh entries.
QCOM is this week's Spotlight Play, but if you held the position
through the recent decline, you didn't make any progress over
the past four months. Those that locked in profits are now in
a position to step back into the play and do it all over again.
How about a more recent example? Agilent (A) gave us a couple of
great entry points in the low $50's before shooting as high as
$68 a couple weeks ago. Its sharp rise took it right through
the upper Bollinger band and the daily stochastics once again
moved into overbought. Sure enough, profit taking emerged and
in just the past 5 sessions, those that were holding positions
without stop losses watched a nearly 50% gain turn into a loss.
Why do we let this happen? Is it greed, complacency, or ego?
It doesn't really matter, does it? This is likely the kind of
pattern we can expect to see going forward, and we need to
change our habits to take advantage of the profits that are
consistently offered.
Alright, let's look at one more that appears to be materializing
before our very eyes. DELL finally began to firm near the
$16-17 level in early January, and accordingly, we added it to
the playlist. Since then, the stock has staged an impressive
rally, scaling resistance at $20, $22, and then $25 before
finally running out of steam near $27. After spending 8 full
days flirting with the upper Bollinger band as the daily
stochastics moved solidly into overbought territory. At the
same time, our 2002 LEAP has grown by 80%. Nobody should give
back an 80% profit, no matter how much time value is left. So
where is your stop loss on DELL? How much of the gain are you
willing to give back if the NASDAQ takes a turn for the worse?
Hopefully you are talking back to your computer right now,
telling me you don't need to hear about stop losses, because you
already have them in place, and you have been locking in your
profits. If you have, then congratulate yourself for being a
smart options trader and learning to be profitable, despite a
difficult market environment.
Alright, before I leave you, I think we need to cover a few
items related to what to expect going forward. First off, you
know that I talk about the VIX every week, and how important it
is for forecasting near-term market tops and bottoms. For those
just joining us, the basic rule of thumb for LEAPS investing is
to buy new positions when the VIX is high (above 30), and lock
in profits (or tighten stops) when the VIX is low (below 20).
Recall that the VIX is a measure of implied volatility on the
OEX index. While it is indicative of the bullishness or
bearishness of the overall market, we are still lacking a
measure that we can apply directly to the NASDAQ market.
Many thanks to Mary Redmond for pointing out that the CBOE has
come through again. In her Trader's Corner article last
Wednesday, she pointed out that the CBOE has introduced a new
volatility index, VXN.X which tracks the volatility of options
on the NASDAQ market. I highly recommend reviewing her article
for more details on this index. If I was a betting man, I
would wager that the VXN will become highly useful to those of
us that prefer to trade options on NASDAQ listed stocks.
For the record, the VIX has declined significantly over the past
few weeks, dropping as low as 23.77 early last week, and ending
the week right smack in the middle of its historical range at
25.48. It is hard to draw any conclusions about future market
direction from this value right now, but given the uncertainty
surrounding the pending FOMC meeting and the current technicals
on both the NASDAQ and OEX (rolling over from upper Bollinger
bands, and Stochastics threatening to drop out of the overbought
zone), I am looking for some near-term weakness. Of course,
both of these important indices have cleared and found support
at their respective 50-dmas, indicating that last week's
weakness could just be a prelude to the next leg up. Either
way, it promises to be another exciting week, with plenty of
trading opportunities.
One final cautionary note on the playlist. We have 3 plays
which we are placing on probation, AXP, TXN, and NOK. All
three have been performing poorly of late, and if they violate
their near-term support levels, will be ejected from the
playlist in short order. For the record, these levels are $45
for AXP, $35 for NOK, and $37 for TXN. Adjust your trading
plan accordingly, and we will re-evaluate them next week.
Trade smart, and take profits when they are offered.
Current Plays
SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN
EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $40.50 326.32%
09/17/00 JAN-2003 $100 VUE-AT $32.75 $21.38 -34.72%
CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 7.13 -35.23%
11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 7.25 -56.39%
NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $10.38 -31.39%
09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 5.38 -80.44%
AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 7.20 -61.35%
08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $16.50 - 5.71%
AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $ 8.75 - 6.22%
WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $22.63 320.63%
10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $14.75 87.30%
NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 5.25 -69.57%
07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $ 8.88 -49.97%
C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $13.13 27.35%
10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $11.38 - 7.10%
GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $33.25 94.10%
JAN-2003 $ 70 OZG-AN $23.13 $42.00 81.58%
QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $29.13 29.44%
JAN-2003 $ 70 VLM-AN $29.63 $37.50 26.56%
TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $ 7.75 -43.64%
JAN-2003 $ 50 VXT-AJ $18.38 $12.50 -31.97%
BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $16.50 - 4.35%
JAN-2003 $ 70 VNG-AN $25.00 $24.25 - 3.00%
MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $13.25 0.95%
JAN-2003 $ 45 VGY-AI $17.25 $18.63 8.00%
A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $16.25 - 3.70%
JAN-2003 $ 60 OAE-AL $19.88 $19.75 - 0.63%
ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 6.88 -11.29%
JAN-2003 $ 35 VOR-AG $11.13 $10.25 - 7.91%
QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $11.75 -22.34%
JAN-2003 $ 75 VZQ-AW $19.25 $15.38 -20.10%
WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 9.38 - 2.55%
JAN-2003 $ 55 VWT-AK $14.00 $14.00 - 0.00%
DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 9.88 88.10%
JAN-2003 $ 25 VDL-AE $ 5.63 $ 9.63 70.96%
WCOM 01/14/01 JAN-2002 $ 25 WQM-AE $ 5.00 $ 4.25 -15.00%
JAN-2003 $ 25 VQM-AE $ 7.38 $ 6.50 -11.86%
CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $13.00 23.81%
JAN-2003 $ 40 OLB-AH $15.38 $17.63 14.67%
Spotlight Play
QCOM - Qualcomm, Inc. $81.00
Investors and analysts alike cheered QCOM's solid earnings
report and bullish forecast for the CDMA market. The company's
CEO, Irwin Jacobs said demand was strong and still growing for
the company's technology, and he anticipates further growth
both domestically and internationally during the next year,
with particular focus on third generation CDMA deployment.
After falling from the $106 level in early December, shares of
the company had retraced back to the $70 support level, and
then began to recover leading up to the earnings announcement.
After the news was released, QCOM continued its recovery,
tacking on nearly 10% on Friday to close back over the 200-dma
(now at $76.75). Friday's rally was confirmed by very strong
volume, coming in at nearly double the ADV, and indicating that
there is likely more to come. Aggressive traders will want to
target shoot any dips to the $76-78 level while more
conservative players will want to wait for a continuation of
the rally that takes the stock through 50-dma ($82.75) or even
the $84 resistance level. Just watch out for profit taking
near the upper Bollinger band ($88.50). As long as the NASDAQ
can keep from selling off in the wake of next week's FOMC
meeting, QCOM should be able to continue its ascent back
towards triple digit status.
BUY LEAP JAN-2002 $85.00 WIJ-AQ at $23.00
BUY LEAP JAN-2003 $90.00 VLM-AR at $30.88
New Plays
ARBA - Ariba, Inc. $40.00
After a rough 4 months, B2B stocks appear to be showing some
signs of life, and as one of the leading stocks in the sector,
ARBA is providing us a rare bargain. The company provides
software, network access and commerce services that enable
corporations to electronically automate and optimize business
with their buyers and suppliers. ARBA offers commerce services
such as content management, electronic payment, electronic
sourcing and logistics, among others. After declining more
than 80% from its September highs near $170, ARBA has started
building a base near $32-34, giving us a solid level where we
can place our stop. Since closing just above $34 in early
January, ARBA has been gradually moving higher, creating a nice,
gradual uptrend that should continue as it becomes clear that
the company is one of the emerging winners in the B2B market.
The ascending trendline (currently $37.50) is the most likely
level where aggressive traders will want to consider new
positions, although a bounce from the $35 support level could
provide an even better entry. Just make sure that this support
level is being defended by solid buying volume before playing.
With weekly stochastics flattening out in oversold territory,
and daily stochastics beginning a tenuous recovery, this looks
like a great level to initiate new positions for the next run
higher as the company moves into profitability later on this
year. Speaking of profits, ARBA posted a sharp increase in
earnings earlier this month, and solid revenue growth. It
seems that every analyst under the sun stepped up to downgrade
the stock on concerns about a change in the company's accounting
practices, and fears of slowing growth. Despite the downgrades,
the stock behaved well, and looks poised to have a stellar year
of growth. More conservative entries can be had as the stock
crests its first level of resistance near $43. Although ARBA
can have dramatic swings in price, the recent decrease in
volatility combined with solid support, allows us to limit our
downside risk by placing a fixed stop at $32.
BUY LEAP JAN-2002 $45.00 YYR-AI at $14.25
BUY LEAP JAN-2003 $45.00 OLR-AI at $19.00
Drops
None
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**************************************************************
**********
DISCLAIMER
**********
Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html

The Option Investor Newsletter Sunday 01-28-2001
Sunday 5 of 5
To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/012801_5.asp
*************
COVERED CALLS
*************
Fear and Loathing in the Market: Gauging Anxiety
By Mark Wnetrzak
One of our subscribers asked about the new volatility indices
at the CBOE and the AMEX, and the way they can be used to help
determine market direction.
This week, the Chicago Board of Options Exchange launched a new
volatility index to estimate the amount of fear in the technology
market through the prices of a specific index options contract.
Never one to be outdone, the American Stock Exchange also began
its volatility index based on NASDAQ 100-related options. Index
options on the NASDAQ 100, or NDX, trade at the CBOE, while at
the AMEX, options trade on the NASDAQ 100 unit trust, or QQQ.
The CBOE's new technology volatility index has the ticker symbol
VXN (already labeled "The Vixen") while the AMEX volatility index
has the ticker symbol QQV.
The demand for a VIX (a volatility index based on the S&P 100 or
OEX options) style indicator for NASDAQ stocks has increased in
recent years, in part because volume in OEX options has declined
and because gauging the volatility in the technology segment has
become more important to contrarian traders. Implied volatility,
a key factor in an option's price, is the annualized measure of
how much the market thinks a stock or index can potentially move.
It is a critical factor and generally measures uncertainty about
the prospects for the underlying stock or index. The relative
value of the VIX reflects the market's overall anxiety by rising
when put-option buying increases on OEX options, thus reflecting
an increasing desire to hedge for downside movement. Analysts
interpret the VIX using a theory of inverse proportion, meaning
low values on the VIX are bearish, while high values are bullish.
Both of the new volatility trackers will be based on the top 100
NASDAQ stocks, extending the reach of current anxiety measures to
leading technology issues. As with the traditional VIX, there is
an inverse relationship to the price of the NASDAQ 100 Index (or
unit trust) and the VXN or QQV. When the volatility in either
gauge moves higher, the market is expected to fall. Before you
decide to include the VXN (or QQV) as part of your daily trend
analysis, it's important to understand how these gauges determine
market sentiment. In the case of the VXN, it is constructed in
the same basic way as the VIX, substituting implied volatility in
NDX options for the OEX. When volatility spikes to extreme highs,
that usually indicates a rapidly falling market. It is a sign of
panic and when the VIX finally reaches a peak, everyone who is
going to sell has probably already done so, thus it is probably a
good time to buy. When the VIX reaches extremely low levels, it
means that traders are complacent. Option buyers are timid while
sellers are aggressive, and both for similar reasons: nobody is
anticipating much movement in the market. Of course, when the
majority of people agree on a particular outlook, the opposite
generally happens and in this instance, upside surprises are a
rare occurrence.
Over the past few months there have been extremely large swings
in the prices of stocks quoted on the major exchanges. Experts
have tried to put forward theories to explain this phenomenon and
more still have tried to use these rationale in order to predict
future market character. As it stands, analysts cannot agree on
whether or not it is economic or psychological realities that are
the major cause of price fluctuations in the stock market. While
it's important to be aware of the reasons behind this volatility,
most investors would do better to simply understand the historical
relationships between popular indicators and market direction, and
use this knowledge to become a more successful trader.
Good Luck!
SUMMARY OF PREVIOUS PICKS
*****
NOTE: Using Margin doubles the listed Monthly Return!
Stock Price Last Call Strike Price Profit Monthly
Symbol Picked Price Month Sold Picked /Loss Return
GEN 10.50 11.00 FEB 10.00 1.50 *$ 1.00 12.1%
ANTC 11.25 12.31 FEB 10.00 2.25 *$ 1.00 9.9%
XLA 8.38 9.63 FEB 5.00 3.88 *$ 0.50 9.9%
CLRS 7.88 8.63 FEB 5.00 3.25 *$ 0.37 8.7%
RDRT 7.56 9.50 FEB 5.00 2.88 *$ 0.32 7.4%
HOTT 22.13 23.75 FEB 17.50 5.88 *$ 1.25 6.9%
SCON 7.13 8.44 FEB 5.00 2.44 *$ 0.31 5.9%
ENTU 20.31 17.69 FEB 15.00 6.00 *$ 0.69 5.2%
ASTSF 16.31 16.00 FEB 12.50 4.38 *$ 0.57 5.2%
CPST 34.19 36.06 FEB 25.00 10.50 *$ 1.31 4.9%
MCCC 20.00 18.50 FEB 17.50 3.25 *$ 0.75 4.9%
BKHM 22.56 17.00 FEB 17.50 6.13 $ 0.57 3.8%
ATHM 8.72 6.47 FEB 7.50 2.00 $ -0.25 0.0%
*$ = Stock price is above the sold striking price.
Comments:
Read-Rite (NASDAQ:RDRT) came through with great earnings - maybe
just buying a few call options would've been best. ASE Test
Limited's (NASDAQ:ASTSF) move on Friday is a bit worrisome - a
close watch next week is in order as a test towards the 50 dma
could unfold. It remains to be seen if Bookham Technology
(NASDAQ:BKHM) and At Home Corp. (NASDAQ:ATHM) will survive after
warning this week. Bookham expects to show a greater loss than
previously expected mostly due to acquisition costs when it
reports in February. ATHM, which on Thursday reported earnings
in-line with estimates, warned of higher than expected losses
next quarter. Are these a couple of early exit candidates?
NEW PICKS
*********
Sequenced by Company
*****
Stock Last Call Strike Option Last Open Cost Days to Monthly
Symbol Price Month Price Symbol Bid Intr Basis Expiry Return
FNSR 36.38 FEB 30.00 FQY BF 7.50 287 28.88 21 5.6%
GEN 11.00 FEB 10.00 GEN BB 1.31 51 9.69 21 4.6%
ISLD 6.13 FEB 5.00 SUH BA 1.50 1947 4.63 21 11.6%
ONNN 8.00 FEB 7.50 NMQ BU 1.56 1150 6.44 21 23.8%
PGNX 27.38 FEB 20.00 GUB BD 8.13 14 19.25 21 5.6%
SFAM 8.63 FEB 7.50 FQF BU 1.88 129 6.75 21 16.1%
VPHM 22.13 FEB 17.50 HPU BW 5.38 105 16.75 21 6.5%
Sequenced by Return
*****
Stock Last Call Strike Option Last Open Cost Days to Monthly
Symbol Price Month Price Symbol Bid Intr Basis Expiry Return
ONNN 8.00 FEB 7.50 NMQ BU 1.56 1150 6.44 21 23.8%
SFAM 8.63 FEB 7.50 FQF BU 1.88 129 6.75 21 16.1%
ISLD 6.13 FEB 5.00 SUH BA 1.50 1947 4.63 21 11.6%
VPHM 22.13 FEB 17.50 HPU BW 5.38 105 16.75 21 6.5%
FNSR 36.38 FEB 30.00 FQY BF 7.50 287 28.88 21 5.6%
PGNX 27.38 FEB 20.00 GUB BD 8.13 14 19.25 21 5.6%
GEN 11.00 FEB 10.00 GEN BB 1.31 51 9.69 21 4.6%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, MR-Monthly Return.
*****
FNSR - Finisar $36.38 *** Earnings Rally ***
Finisar (NASDAQ:FNSR) is a provider of fiber optic subsystems
and network performance test systems that enable high-speed
communications over Gigabit Ethernet LANs and Fibre Channel
based storage area networks (SANs). FNSR's optical subsystems
convert electrical signals into optical signals (light pulses)
for high speed, reliable transmission over fiber optic lines.
The company sells its optical subsystems to manufacturers of
networking and storage equipment that in turn develop and market
systems based on Gigabit Ethernet and Fibre Channel technology.
In November, Finisar beat analysts' expectations and now it
appears investors believe a repeat performance will occur.
Finisar reports earnings February 20, the week after February
options expire. Two potentially profitable fiber-optic products
in the pipeline, Transviewer and Opticity, and the company's
recent acquisitions should bode well for the future.
FEB 30.00 FQY BF LB=7.50 OI=287 CB=28.88 DE=21 MR=5.6%
/charts/jan01/charts.asp?symbol=FNSR
*****
GEN - GenRad $11.00 *** Stage I ***
GenRad (NYSE:GEN) develops, manufactures and markets advanced
performance-assurance technologies. GenRad has four business
units, bringing to market integrated hardware, software and
service solutions that empower always-on services and business
applications. Last week, GenRad's public relations service went
into overdrive as the company announced several partnerships and
the introduction of several new services and products. This week
the company announced some new service awards and investors appear
to be pleased as stock has moved higher on heavy volume. The
company anticipates a revenue growth of 10% to 30% for 2001. We
favor the Stage I base and improving technical signals.
FEB 10.00 GEN BB LB=1.31 OI=51 CB=9.69 DE=21 MR=4.6%
/charts/jan01/charts.asp?symbol=GEN
*****
ISLD - Digital Island $6.13 *** Cheap Speculation! ***
Digital Island (NASDAQ:ISLD) is the leading provider of managed
Internet infrastructure for enterprises that need to give their
customers a great Web experience in order to drive e-Business
transactions. The company integrates managed hosting, content
delivery and network services to bypass Internet congestion and
guarantee fast and relevant interactions. Is Digital Island
putting in a technical bottom? Will the company's earnings report
(due Wednesday) please Wall Street? Is there still a possibility
the company will be bought out for $15-$20 a share? These are
questions to answer - for our more speculative investors.
FEB 5.00 SUH BA LB=1.50 OI=1947 CB=4.63 DE=21 MR=11.6%
/charts/jan01/charts.asp?symbol=ISLD
*****
ONNN - ON Semiconductor $8.00 *** Bottom Fishing ***
ON Semiconductor (NASDAQ:ONNN) is a global supplier of high-
performance broadband and power management integrated circuits
and standard semiconductors used in numerous advanced devices
ranging from high-speed fiber optic networking equipment to the
precise power management functions in today's advanced portable
electronics. In December, ON warned that sales for the their
4th-quarter are expected to be lower as they are experiencing
the same softness in the computing, communications and consumer
markets that has emerged throughout the sector. With the bad
news now priced-in, investors appear to be looking past the
near-term as the stock has exited a Stage IV downtrend. A
reasonable cost basis for those investors who retain a bullish
outlook on the company and believe Wednesday's earnings report
will be void of any negative surprises.
FEB 7.50 NMQ BU LB=1.56 OI=1150 CB=6.44 DE=21 MR=23.8%
/charts/jan01/charts.asp?symbol=ONNN
*****
PGNX - Progenics Pharma $27.38 *** New Drug Speculation ***
Progenics Pharmaceuticals (NASDAQ:PGNX)is a biopharmaceutical
company focusing on the development and commercialization of
products for the treatment and prevention of cancer, viral, and
other life-threatening diseases. The Company's lead HIV product,
PRO 542, has completed two Phase I/II clinical trials, and two
follow-on HIV products, PRO 367 and PRO 140, are preparing to
commence Phase I/II trials. The Company's most advanced
product, GMK, is a cancer vaccine in pivotal Phase III clinical
trials for the treatment of malignant melanoma. Progenics is
also prepared to commence Phase II trials with a second cancer
vaccine, MGV, with broad application to a variety of cancers.
On Wednesday, Progenics published favorable results for this
MGV vaccine: the production of antibodies to both components
of MGV without significant toxicity. A reasonable cost basis
from which to speculate on the Progenics drug pipeline.
FEB 20.00 GUB BD LB=8.13 OI=14 CB=19.25 DE=21 MR=5.6%
/charts/jan01/charts.asp?symbol=PGNX
*****
SFAM - SpeedFam-IPEC $8.63 *** Post-Earnings Rally ***
SpeedFam-IPEC (NASDAQ:SFAM) is a pioneer and innovator in the
manufacture of chemical mechanical planarization (CMP) systems
used in the fabrication of next-generation semiconductor devices,
with the world's largest installed base. The company also
markets and distributes parts used in CMP and precision surface
processing. SpeedFam reported 2nd-quarter earnings in December
showing revenue up 49% to $82.9 million. With the company
expecting to begin shipping its revolutionary Momentum(TM) CMP
system this quarter, SpeedFam is achieving results that are
better than they had originally forecast. The stock has rallied
strongly off its December low and is on the verge of moving above
the November high. In other words, the downtrend has ended and
the basing phase has begun.
FEB 7.50 FQF BU LB=1.88 OI=129 CB=6.75 DE=21 MR=16.1%
/charts/jan01/charts.asp?symbol=SFAM
*****
VPHM - ViroPharma $22.13 *** Trading Range ***
ViroPharma (NASDAQ:VPHM) is a pharmaceutical company engaged in
the discovery and development of new antiviral medicines for the
treatment of diseases caused by RNA viruses including: viral
respiratory infection (VRI); viral meningitis; hepatitis C; and
respiratory syncytial virus (RSV) diseases. The company has
recently completed enrollment in their ongoing VRI Phase III
studies, and expects to announce results in April. Pending
favorable results, the company expects to file for a NDA later
this year. The company has been in a Stage I base for about
a year and technicals suggest the current trend will continue.
A favorable short-term profit at the risking of owning ViroPharma
at a price near long-term technical support.
FEB 17.50 HPU BW LB=5.38 OI=105 CB=16.75 DE=21 MR=6.5%
/charts/jan01/charts.asp?symbol=VPHM
*****
*****************
SUPPLEMENTAL COVERED CALLS
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Return
*****
Stock Last Call Strike Option Last Open Cost Days to Monthly
Symbol Price Month Price Symbol Bid Intr Basis Expiry Return
SBL 46.44 FEB 45.00 SBL BI 3.75 496 42.69 21 7.8%
VARI 41.13 FEB 35.00 IUA BG 7.75 19 33.38 21 7.0%
VECO 57.50 FEB 45.00 QVC BI 14.50 45 43.00 21 6.7%
GNSS 17.00 FEB 15.00 QFE BC 2.50 354 14.50 21 5.0%
RDRT 9.50 FEB 7.50 RDQ BU 2.25 6833 7.25 21 5.0%
PRIA 30.19 FEB 25.00 UXQ BE 6.00 552 24.19 21 4.8%
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***********************
CONSERVATIVE NAKED PUTS
***********************
Option Trading Mechanics: Spin-offs and Stock Splits
By Ray Cummins
Our recent position in Sorrento Networks (NASDAQ:FIBR) provoked
an inquiry about the conflicting option symbols for that issue.
The different series are the results of a common practice in the
market; a spin-off of common stock for a new company.
The question was, "Why are there two separate option symbols for
Sorrento Networks, and what happens to the original strike price
after there is a spin-off?" In the case of FIBR, the new option
series was initiated after the company announced the spin-off of
communications equipment maker Entrada Networks (NASDAQ:ESAN).
Under the terms of the transaction, each shareholder of Sorrento
common stock received 0.25 shares of ESAN for each share of FIBR
held on the date of record, November 20, 2000. Thus, an investor
with 1000 shares of FIBR received 250 shares of ESAN and the two
option series reflect the adjusted basis; one includes ESAN stock,
one does not. With regard to the new option (strike) prices, the
concept is that the value of the underlying prior to a spin-off
will equal the value of the underlying after the spin-off. For
example, you own FEB-$15 call options before the spin-off, the
underlying component of your option will be adjusted to include
100 of the original shares plus 25 shares in ESAN, and you can
sell the position with the knowledge that your underlying interest
has been maintained. After the shares are issued, an adjustment
to the original series is initiated, and those options generally
trade with a new ticker symbol; to indicate the change in basis.
Occasionally, new symbols may be added (after the ex-date) that
are identical to the series that traded prior to the adjustment.
These option contracts do not include the shares of the spin-off
company, thus it is important to make sure that when you close a
position established before the new shares were issues, you use
the correct option series symbols.
Normally, when a company makes an announcement concerning a stock
split or spin-off, the option exchange (CBOE, AMEX, or PHLX etc.)
will publish an explanation of how the current class and series
will be adjusted to account for the distribution of new shares.
Since every transaction of this nature has its own unique aspects,
it is important to understand the effects on the current options
before you initiate a position.
An important note for option traders:
The next phase of decimalization is approaching. On January 29,
the remaining exchange-listed securities, all exchange-traded
funds, index notes, trust preferred securities, and PHLX index
options will begin trading in decimals. The underlying options
for securities in this phase will also trade in decimal format.
For options, premiums for these securities equal to or greater
than $3 will be priced in ten-cent increments, and premiums less
than $3 will be priced in five-cent increments. Trading should
be fully decimalized by April 2001.
Good Luck!
*** WARNING ***
Occasionally a company will experience catastrophic news causing
a severe drop in the stock price. This may cause a devastatingly
large loss which may wipe out all of your smaller gains. There is
one very important rule; Don't sell naked puts on stocks that you
don't want to own! It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops. Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a buy-to-close STOP at a price that is no more than twice
the original premium from the sold option.
SUMMARY OF PREVIOUS PICKS
*****
Stock Price Last Put Strike Price Profit Monthly
Symbol Picked Price Month Sold Picked /Loss Return
FIBR 26.38 26.00 FEB 17.50 0.69 *$ 0.69 12.6%
JNIC 29.00 21.63 FEB 17.50 0.75 *$ 0.75 12.4%
RATL 47.88 50.38 FEB 35.00 1.25 *$ 1.25 10.3%
TVLY 20.69 20.88 FEB 15.00 0.38 *$ 0.38 9.1%
SMTC 27.75 27.06 FEB 17.50 0.63 *$ 0.63 9.1%
GMST 52.69 52.69 FEB 35.00 1.19 *$ 1.19 9.1%
PLUG 19.94 25.06 FEB 12.50 0.44 *$ 0.44 8.9%
ISSI 17.75 18.13 FEB 12.50 0.38 *$ 0.38 8.7%
PPRO 22.31 25.50 FEB 12.50 0.38 *$ 0.38 8.5%
MFNX 18.69 16.06 FEB 12.50 0.38 *$ 0.38 8.3%
AVCI 37.13 31.25 FEB 20.00 0.69 *$ 0.69 7.6%
BMCS 32.13 29.19 FEB 22.50 0.44 *$ 0.44 7.0%
EXFO 50.44 42.69 FEB 30.00 0.69 *$ 0.69 7.0%
MU 46.44 43.94 FEB 35.00 0.56 *$ 0.56 6.2%
*$ = Stock price is above the sold striking price.
Comments:
JNI Corp. (NASDAQ:JNIC) looks worrisome with a post-earnings
drop. A violation of the early January low should mark this
candidate for an early exit. Many of the above candidates
are consolidating after recent gains yet still appear to be
in a bullish phase. Excessive pullbacks should raise a
warning flag, especially if a key support area is violated.
NEW PICKS
*********
Sequenced by Company
*****
Stock Last Put Strike Option Last Open Cost Days to Monthly
Symbol Price Month Price Symbol Bid Intr Basis Expiry Return
ARTG 34.50 FEB 25.00 AYQ NE 0.69 59 24.31 21 13.2%
EXPE 16.25 FEB 12.50 UED NV 0.31 0 12.19 21 12.6%
GLGC 23.88 FEB 17.50 CYV NW 0.31 78 17.19 21 8.8%
PRIA 30.19 FEB 22.50 UXQ NX 0.38 442 22.12 21 8.6%
SPCT 21.94 FEB 17.50 QCS NW 0.38 45 17.12 21 11.5%
TER 39.56 FEB 32.50 TER NZ 0.56 713 31.94 21 8.7%
VECO 57.50 FEB 30.00 QVC NF 0.56 110 29.44 21 6.7%
Sequenced by Return
******
Stock Last Put Strike Option Last Open Cost Days to Monthly
Symbol Price Month Price Symbol Bid Intr Basis Expiry Return
ARTG 34.50 FEB 25.00 AYQ NE 0.69 59 24.31 21 13.2%
EXPE 16.25 FEB 12.50 UED NV 0.31 0 12.19 21 12.6%
SPCT 21.94 FEB 17.50 QCS NW 0.38 45 17.12 21 11.5%
GLGC 23.88 FEB 17.50 CYV NW 0.31 78 17.19 21 8.8%
TER 39.56 FEB 32.50 TER NZ 0.56 713 31.94 21 8.7%
PRIA 30.19 FEB 22.50 UXQ NX 0.38 442 22.12 21 8.6%
VECO 57.50 FEB 30.00 QVC NF 0.56 110 29.44 21 6.7%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, MR-Monthly Return.
*****
ARTG - Art Technology Group $34.50 *** Great Earnings! ***
Art Technology Group (NASDAQ:ARTG) offers an integrated suite
of Internet customer relationship management and e-commerce
software applications, as well as related application development,
integration and support services. The company's solution enables
businesses to manage and build online customer relationships and
to market and support products and services over the Internet
more effectively. The company's Dynamo product suite includes an
application server that is specifically designed to enable and
support Web applications, as well as e-commerce and other customer
management applications. ARTG soared after reporting higher than
expected earnings last week, and Deutsche Banc Alex. Brown analyst
Tim Dolan raised his earnings outlook on the company for the next
two years. The positive outlook is based on a belief that ARTG's
momentum is strong, with top-notch technology that positions the
company favorably with respect to its larger peers. We like the
bullish change in character and the chance to own the issue at a
discount.
FEB 25.00 AYQ NE LB=0.69 OI=59 CB=24.31 DE=21 MR=13.2%
/charts/jan01/charts.asp?symbol=ARTG
*****
EXPE - Expedia $16.25 *** Earnings Play! ***
Expedia (NASDAQ:EXPE) is a leading provider of branded online
travel services for leisure and small business travelers. The
company operates its own website, located at Expedia.com, with
localized versions in the United Kingdom, Germany and Canada. The
company also operates Travelscape.com, LVRS.com, VacationSpot.com
and Rent-a-Holiday.com, and a Travelscape/LVRS sales call-center
in Las Vegas. The company offers one-stop travel shopping and
reservation services, providing reliable, real-time access to
schedule, pricing and availability information for 450 airlines,
65,000 lodging properties, and all major car rental companies.
Expedia rallied in the wake of Travelocity's excellent earnings
and traders are now waiting for the report from Expedia. If you
think that earnings will be favorable, speculate on the outcome
with this conservative position.
FEB 12.50 UED NV LB=0.31 OI=0 CB=12.19 DE=21 MR=12.6%
/charts/jan01/charts.asp?symbol=EXPE
*****
GLGC - Gene Logic $23.88 *** Stage I Base ***
Gene Logic (NASDAQ:GLGC) provides products and services in the
areas of gene expression information, data management and
bio-informatic software, and pharma-cogenomics. These products
and services are all designed to improve the efficiency and
effectiveness of the drug discovery and development process.
They may also be applied to research and development in other
sectors, such as diagnostics, animal health, and agriculture.
The company's information products combine software tools with
large-scale gene expression information, which specifies the
degree to which genes are active in a broad range of normal,
diseased, and treated conditions. This combination enables
scientists to produce new biological knowledge by integrating
this proprietary expression information with a growing array of
biological information available on the Internet. Gene-Logic
has moved back into a comfortable trading range near $20-$22 and
it appears that a cost basis near $17 offers a high probability
of risk versus reward.
FEB 17.50 CYV NW LB=0.31 OI=78 CB=17.19 DE=21 MR=8.8%
/charts/jan01/charts.asp?symbol=GLGC
*****
PRIA - PRI Automation $30.19 *** Technicals Only ***
PRIA (NASDAQ:PRIA) supplies automation systems for semiconductor
manufacturers and OEMs whose mission is to improve productivity
in semiconductor manufacturing. The company offers a broad range
of integrated solutions consisting of factory automation hardware
and software that optimize the flow of materials and data through
the semiconductor fabrication facility. PRIA provides automation
services including equipment layout & design; simulation; project
management; installation; and, on-site support. PRIA reported
excellent earnings last week and the issue was promptly upgraded
by a number of analysts including Robertson Stephens and CIBC
World Markets. We favor the improving technical signals as the
stock moves out of a Stage I base.
FEB 22.50 UXQ NX LB=0.38 OI=442 CB=22.12 DE=21 MR=8.6%
/charts/jan01/charts.asp?symbol=PRIA
*****
SPCT - Spectrian $21.94 *** On The Move! ***
Spectrian (NASDAQ:SPCT) is engaged in the design, manufacture and
sale of high-power radio frequency amplifiers and semiconductor
devices, through its division that operates under the trade name
UltraRF, for the global wireless communications industry. Their
power amplifiers are utilized as part of the infrastructure for
both wireless voice and data networks. The company's amplifiers
boost the power of a signal so that it can reach a wireless phone
or other device within a designated geography. Spectrian reported
record revenues last week and investors showed their appreciation,
driving the issue to recent highs. Spectrian achieved the results
by doubling their multi-carrier amplifier sales from the previous
quarter and the future outlook for sales in that product segment
is excellent. A cost basis near $15 appears to be a relatively
safe entry point in the issue.
FEB 17.50 QCS NW LB=0.38 OI=45 CB=17.12 DE=21 MR=11.5%
/charts/jan01/charts.asp?symbol=SPCT
*****
TER - Teradyne $39.56 *** Own This One! ***
Teradyne (NYSE:TER) is a leading manufacturer of automatic test
equipment and other related software for the electronics and
communications industries. Their products include systems to test
semiconductors, circuit boards, telephone lines and networks, and
software. Teradyne also is a leading manufacturer of back-planes
and associated connectors used in electronic systems. As with all
the semiconductor issues, Teradyne recently reported weak earnings
and lowered their revenue estimates for the upcoming quarter. An
analyst from Lehman Brothers said the current slowdown in business
will remain for the next few months but has the potential for a
sharp rebound later in the year. Apparently, the news has already
been priced into the issue as the report has little affect on TER's
share value. If want to own a solid company in the chip-equipment
segment, Teradyne may be the stock for you.
FEB 32.50 TER NZ LB=0.56 OI=713 CB=31.94 DE=21 MR=8.7%
/charts/jan01/charts.asp?symbol=TER
*****
VECO - Veeco Instruments $57.50 *** On The Rebound? ***
Veeco Instruments (NASDAQ:VECO) designs, manufactures, markets and
services a broad line of equipment primarily used by manufacturers
in the data storage, optical telecommunications and semiconductor
industries. These industries create a wide range of information
age products for today and tomorrow, such as personal computers,
network servers, fiber optic networks, digital cameras, TV set-top
boxes and personal digital assistants. Veeco offers two principal
product lines: Metrology and Process Equipment. A subsidiary of
the company, CVC provides cluster tool manufacturing equipment for
the production of evolving tape and disk drive head fabrication,
optical components, passive components, MRAM, bump metallization,
and next generation logic devices. Veeco shares rallied earlier in
the month after the company said its fourth-quarter orders topped
expectations. Now the question is what affect the orders will have
on the company's earnings, due in mid-February.
FEB 30.00 QVC NF LB=0.56 OI=110 CB=29.44 DE=21 MR=6.7%
/charts/jan01/charts.asp?symbol=VECO
*****
*****************
SUPPLEMENTAL NAKED PUTS
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Return
******
Stock Last Put Strike Option Last Open Cost Days to Monthly
Symbol Price Month Price Symbol Bid Intr Basis Expiry Return
PPRO 25.50 FEB 17.50 PXZ NW 0.56 422 16.94 21 14.3%
GSPN 40.69 FEB 30.00 GLQ NF 0.81 518 29.19 21 13.1%
AZPN 39.75 FEB 35.00 ZQP NG 0.75 20 34.25 21 9.1%
AEOS 50.81 FEB 40.00 AQU NH 0.50 207 39.50 21 6.8%
FLEX 39.00 FEB 30.00 QFL NF 0.38 392 29.62 21 6.7%
GMST 52.69 FEB 35.00 QLF NG 0.44 443 34.56 21 5.8%
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************************************************************
************************
SPREADS/STRADDLES/COMBOS
************************
A Cautiously Optimistic Outlook For Stocks...
Friday, January 26
Investors participated in the market with little enthusiasm today,
unwilling to make any large bets ahead of the upcoming Federal
Reserve policy meeting. The NASDAQ recorded a small gain, ending
27 points higher at 2,781 while the Dow ended down 69 points at
10,659. The S&P 500 index ended relatively unchanged at 1,354.
Trading volume on the NYSE reached 1.08 billion shares, with
losers beating winners 1,440 to 1,397. Volume on the Nasdaq was
moderate at 2.27 billion shares exchanged, with declines beating
advances 1,899 to 1,880. In the bond market, the U.S. 30-year
Treasury fell 24/32, pushing its yield up to 5.64%.
Thursday's new plays (positions/opening prices/strategy):
Atlantic Air (NYSE:ACAI) FEB35P/40P $1.00 credit bull-put
Aflac (NYSE:AFL) FEB75C/70C $0.50 credit bear-call
HSBC Corp. (NYSE:HBC) FEB70P/75P $0.75 credit bull-put
Atlantic Coast Airlines dropped over $2 at the open and continued
lower for the first hour of trading. The move provided a great
entry premium (as high as $1.12) for traders who are bullish on
the issue. Aflac and HSBC Holdings were less volatile, but both
positions provided reasonable entry opportunities.
Portfolio Plays:
The market traded in a small range today, with uncertainty over
the FOMC meeting preventing any substantial movement. Traders
say that stocks have factored in a rate cut of 50 basis points,
but some analysts are worried that a smaller reduction will be
the decision levied at next week's meeting. The anxiety led to
a sell-off in broad market issues and the NASDAQ was unable to
make any headway in the wake of the unexpected revenue warning
from PMC-Sierra (NASDAQ:PMCS). Shares of the chip maker dropped
23% to $74 after the company said it expects quarterly earnings
to be well below consensus estimates. On a positive note, JDS
Uniphase (NASDAQ:JDSU) ended up almost 10% at $60 after posting
a second-quarter profit that beat First Call estimates by $0.02.
However, the company also announced that earnings for the next
two quarters will be negatively impacted by slowing growth in the
industry. Among other segments, networking, biotechnology and
software shares were the best performers. On the Dow, United
Technologies (NYSE:UTX), Exxon-Mobil (NYSE:XOM), and Minnesota
Mining (NYSE:MMM) led the losers while technology bellwethers
International Business Machines (NYSE:IBM), Intel (NASDAQ:INTC),
and Microsoft (NASDAQ:MSFT) moved higher. Within the broader
market groups, bank stocks gained ground while losses were seen
in brokerage, paper, chemical, oil service and retail shares.
Qualcomm (NASDAQ:QCOM) was the Spreads Portfolio leader, rising
over $7 to $81 after reporting a first quarter profit of $0.29 a
share, beating the consensus estimate of $0.28. The company also
said it will meet second quarter and full year earnings estimates.
At the same time, Ericsson (NASDAQ:ERICY), one of our Reader's
Request plays, was a big loser, down almost $2 to $11.25 after
announcing that earnings per share fell 72% in 2000 over 1999,
and that it will no longer manufacture cell phones in-house.
Ericsson, the world's third largest maker of mobile phones, also
said it would only break even in the first quarter, and cut its
forecast for global mobile phone demand in 2001. The news came
as a surprise to a number of analysts, who later downgraded the
issue. Our calendar spread in April at $15 is in no great danger
as the initial debit was only $0.69 and we can make an adjustment
with the March options. Another time-selling position, our LEAPS
with Covered Calls play on Microsoft (NASDAQ:MSFT) is performing
very well. Today the issue rallied $2.25 to a recent high near
$64 and the long-term diagonal position (JAN02-$50C/FEB70C) is
profitable. Among industrial shares, Household International
(NYSE:HI) was one of the few stocks that enjoyed bullish activity
and the issue now appears poised for a move to a new high. Our
synthetic position at $55 is offering a $1 profit, but we expect
the return to increase in the coming sessions. In the small-cap
group, Conseco (NYSE:CNC) has exceeded all possible expectations,
returning a $5 gain to traders who participated in the synthetic
position. Another low-priced stock that continues to recover is
Boston Scientific (NYSE:BSX) and our FEB-$15 call option (from
this month's diagonal position) is now trading at a 50% profit.
Questions & comments on spreads/combos to Contact Support
******************************************************************
- NEW PLAYS -
******************************************************************
ATRX - Atrix Laboratories $23.13 *** Onward and Upward! ***
Atrix Laboratories (NASDAQ:ATRX) is engaged primarily in the
research, development and commercialization of a broad range of
medical, dental, and veterinary products based on its proprietary
drug delivery systems. With the acquisition of ViroTex, Atrix
has a broad-based platform of drug delivery technologies that
provides for parenteral, transmucosal and topical drug delivery.
These patented technologies have capabilities of delivering small
organic molecules, peptides, proteins, vaccines and other natural
products. The company currently markets two drug products, two
medical device products and two over-the-counter drug products.
The company's flagship product, ATRIDOX, is a minimally invasive
pharmaceutical treatment for periodontitis that employs the
ATRIGEL system containing the antibiotic doxycycline.
Atrix is a drug delivery and drug development company with some
unique patented technologies. Atrix develops most of their drug
products in-house and also partners with large pharmaceutical and
biotechnology companies to apply its proprietary technologies to
new chemical entities, or to extend the life cycle of existing
products. Atrix has strategic alliances with a number of major
pharmaceutical companies including Pfizer, Elan, and Novartis.
The company recently licensed the North American marketing rights
to its Leuprogel products to Sanofi-Synthelabo and they have also
received an exclusive option from Tulane University Health Science
Center to license human growth hormone releasing peptide-1, a new
patented growth promoting compound.
While all of these activities are crucial to the company's success,
we simply favor the positive fundamental outlook and the bullish
technical indications for the issue. With excellent option prices
and plenty of time to become profitable, this position offers a
great speculation play for traders who participate in time-selling
strategies.
PLAY (conservative - bullish/calendar spread):
BUY CALL MAY-25 OQF-EE OI=10 A=$3.50
SELL CALL FEB-25 OQF-BE OI=7 B=$1.00
INITIAL NET DEBIT TARGET=$2.25-$2.38 TARGET ROI=50%
/charts/jan01/charts.asp?symbol=ATRX
******************************************************************
VARI - Varian $41.13 *** On The Rebound! ***
Varian (NASDAQ:VAR) develops, manufactures, sells and services a
variety of scientific instruments and equipment, including those
for studying the chemical composition of substances, nuclear
magnetic resonance spectrometers and high vacuum products. The
company is also a world leader in providing tools and unique
technologies that enable advances in the life sciences, health
care, semiconductor processing, and telecommunications industries.
Although Varian, is a new company, it has a rich technological
heritage dating back more than 50 years. Among other innovations,
Varian was the first to commercialize the NMR spectrometer. The
VacIon pump, invented by Varian for producing ultra-high vacuum
environments, paved the way for important endeavors, including
semiconductor manufacturing and space science research. A truly
global enterprise, the company manufactures in 13 locations on
three continents; operates sales and service offices in North
America, Europe, and the Pacific Rim; employs some 4,100 people;
and sells to more than 20,000 customers annually.
Shares of Varian rallied last week after the company announced
quarterly financial results which included strong growth in sales
and operating profits. Sales for the first quarter of 2001 were
up 20% to $191 million while operating earnings for the quarter
grew 44% to $21 million, up from $14 million in the first quarter
of fiscal 2000. The company expects to continue accelerating its
revenue growth through the introduction of new products aimed at
selective markets, and an increasing contribution from sales of
consumable laboratory supplies and services. The company also
expects to increase operating margin ratios by adjusting their
product mix toward higher margin items, adopting a continuous
program of sales-force improvement, and working to lower current
administrative costs. The company's overall goal is to maintain
the financial and operational flexibility to support a long-term
growth strategy.
Investors appear to support the company's optimistic outlook and
traders who are bullish on the issue can speculate on its future
performance with this moderately aggressive spread position.
PLAY (aggressive - bullish/credit spread):
BUY PUT FEB-30 IUA-NF OI=70 A=$0.62
SELL PUT FEB-35 IUA-NG OI=5 B=$1.43
INITIAL NET CREDIT TARGET=$1.00 ROI(max)=25% B/E=$34.00
/charts/jan01/charts.asp?symbol=VARI
******************************************************************
DIGE - Digene $38.38 *** Trading Range! ***
Digene (NYSE:DIGE) develops, manufactures and markets proprietary
DNA and RNA testing systems for the screening, monitoring and
diagnosis of human diseases. The company has developed and is
commercializing its patented Hybrid Capture Gene Analysis System
and tests in three areas: women's cancers and infectious diseases,
blood viruses, and genomics and pharmaceutical research. Digene's
lead product, the Hybrid Capture II HPV Test, is currently the
only FDA-approved test for the detection of human papillomavirus,
which is the cause of greater than 99% of cervical cancer cases.
In addition, DIGE has developed and launched tests internationally
for the detection and viral load monitoring of major blood viruses,
including cytomegalovirus and hepatitis B virus, and tests for the
detection of two common sexually transmitted infections, chlamydia
and gonorrhea.
DIGE is an excellent candidate for option trading strategies that
benefit from volatile movement in a limited range. The issue has
inflated option prices and a well-defined historical pattern. In
this case, we have decided to take advantage of a small premium
disparity and initiate a bearish spread. Based on analysis of the
underlying stock's technical history, DIGE has a high probability
of remaining below the sold (short) strike price and traders who
agree with a neutral outlook can use this position to profit from
further sideways movement. The company's earnings are due on
February 8, 2001.
PLAY (conservative - bearish/credit spread):
BUY CALL FEB-50 QDG-BJ OI=0 A=$0.31
SELL CALL FEB-45 QDG-BI OI=35 B=$0.81
INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=14% B/E=$45.62
/charts/jan01/charts.asp?symbol=DIGE
******************************************************************
AES - AES Corporation $58.69 *** Reader's Request! ***
The AES Corporation (NYSE:AES) and its subsidiaries are a global
power engaged in electricity generation. Their electricity
generation business consists of sales to wholesale customers
(generally electric utilities, regional electric companies or
wholesale commodity markets known as power pools) for further
resale to end users. AES also sells electricity directly to end
users; commercial, industrial, governmental and residential
customers through its distribution business. In its generation
business, AES operates and owns (entirely or in part) a diverse
portfolio of electric power plants. AES also is currently in
the process of constructing new plants.
One of our readers asked we could search the utility group for
any positions that might benefit from the recent recovery in the
sector. While this issue did not suffer from the California
energy crisis as much as most companies in the segment, it does
appear to have excellent upside potential. Another argument in
favor of AES is the possibility for a plant restart in Southern
California, as the state tries to overcome its most severe power
shortage in history. AES is seeking permission from the State
Energy Commission to upgrade and restart units 3 and 4 of its
Huntington Beach plant, hopefully in time to meet the peak power
load expected in the summer. A decision is expected tomorrow,
along with the company's quarterly earnings report. Traders who
would like to speculate on the future movement of the issue can
do so with this bullish synthetic position. Our opening target
for the play will be a small credit of $0.12-$0.25, as we expect
some profit-taking before the announcement.
PLAY (very speculative - bullish/synthetic position):
BUY CALL FEB-65 AES-BM OI=567 A=$0.62
SELL PUT FEB-50 AES-NJ OI=979 B=$0.38
INITIAL NET CREDIT TARGET=$0.12 TARGET ROI=25%
Note: Using options, the position is equivalent to being long
on the stock. The collateral requirement for the naked put is
approximately $1,500 per contract.
/charts/jan01/charts.asp?symbol=AES
******************************************************************
- STRADDLES AND STRANGLES -
******************************************************************
NFB - North Fork Bancorp $24.19 *** Breakout Coming? ***
North Fork Bancorp (NYSE:NFB) is a bank holding company. The
company's primary subsidiary, North Fork Bank, operates through
its full service retail banking facilities in the New York
metropolitan area. The company's secondary bank subsidiary,
Superior Savings of New England, a savings bank located in the
Connecticut county of New Haven, operates from one location
where it currently conducts a telebanking operation focused on
gathering deposits throughout the New England region. The
company, through its primary subsidiary North Fork Bank and its
investment management and broker/dealer subsidiaries, Compass
Investment Services and Amivest Corporation, provides a variety
of banking and financial services to middle market and small
business organizations, local governmental units, and retail
customers in the New York metropolitan area.
North Fork Bancorp meets our fundamental criteria for favorable
debit straddle. The stock has cheap option premiums, a history
of adequate price movement, and upcoming events (earnings and
the FOMC meeting) that may generate future volatility in the
issue or its industry. In addition, NFB's current technical
pattern (a symmetrical triangle) suggests that a significant
change in character may occur in the coming weeks.
PLAY (conservative - neutral/debit straddle):
BUY CALL MAR-25.00 NFB-CE OI=512 A=$0.75
BUY PUT MAR-25.00 NFB-OE OI=0 A=$1.43
INITIAL NET DEBIT TARGET=$2.00-$2.12 TARGET ROI=20%
/charts/jan01/charts.asp?symbol=NFB
*****************************************************************
TY - Tri Continental $22.69 *** Probability Play! ***
Tri Continental (NYSE:TY) is a diversified closed-end investment
management company. Though common stocks make up the bulk of
investments, assets may be held in cash or invested in all types
of securities, including bonds, debentures, notes, preferred and
common stocks, rights and warrants, as well as other securities.
The company does not make investments with a view to exercising
control or management and does not invest in other investment
companies, but it may purchase up to 3% of the voting securities
of such investment companies. The company has no fixed policy
with respect to portfolio turnover and purchases and sales in the
light of economic, market and other investment considerations.
Investment plans and other services which are available to
investors include the Company's Automatic Dividend Investment and
Cash Purchase Plan, Automatic Check Service, Share Keeping
Service, Tax-deferred Retirement Plans, Tax-deferred Retirement
Plans and Systematic Withdrawal Plan.
This position is a speculative offering for new traders who would
like to try a debit straddle but don't want to risk much capital.
The options are inexpensive and the probability of the position
reaching the break-even price is excellent. However, there is
very little chance of a large return and while the short-term
historical movement suggests plenty of volatility to make the
play profitable, there is also the possibility that the issue
will return to its past habit of limited, range-bound movement.
This position should NOT be initiated for more than the target
debit and new traders should consider closing the play if the
options fall to 50% of their initial value. The target closing
credit will be a very conservative $1.50, to coincide with the
current volatility estimate.
PLAY (speculative - neutral/debit straddle):
BUY CALL MAR-22.25 TY-CV OI=40 A=$0.88
BUY PUT MAR-22.25 TY-OV OI=171 A=$0.38
INITIAL NET DEBIT TARGET=$1.00-1.12 TARGET ROI=30%
/charts/jan01/charts.asp?symbol=TY
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